9911796707
TMI Blog2016 (8) TMI 1162X X X X Extracts X X X X X X X X Extracts X X X X ..... set aside the order of the CIT(A) on this issue and direct the AO to compute the operating margin of the assessee company by adjusting the above expenses. Grounds raised by the assessee on this issue are accordingly allowed. Non granting of working capital adjustment in respect of comparable companies selected by the TPO - Held that:- We find the different Benches of the Tribunal are consistently taking the view that adjustment on account of working capital should be provided. Although this ground was raised before the CIT(A) he has not adjudicated the issue. We find the Pune Bench of the Tribunal in the case of Ariston Thermo India Ltd. [2015 (8) TMI 977 - ITAT PUNE ] as held 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. Thus we restore the issue to the file of the AO with a direction to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as 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 Technologies Ltd. 2.52 7 Sheorey Digital Systems Ltd. 28.77 8 Spry Resources India P. Ltd. 16.71 Mean 15.79 4. He observed that the search criteria and the acceptance re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a comparable 6. The TPO further noted that the following pertinent defects have been found in the TP analysis carried on by the assessee which are as under : 1. Some of the assessee s comparables do not stand scrutiny of FAR analysis. 2. Some 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 58964 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Formerly Vishal Information Technologies Ltd.) 38.69 3 Crossdomain Solutions Ltd. 29.40 4 e4e Healthcare Solutions Ltd. (earlier known as Nittany Outsourcing Services Pvt. Ltd. 33.31 Arithmetic Mean 33.07 10. The assessee agitated the matter before the CIT(A). It was submitted that the TP adjustment has arisen primarily because of the denial of adjustment by the TPO to its operating profit and also because of rejection of certain loss making companies as comparables. It was argued that if the contention of the assessee on these 2 issues are accepted, then the various other grounds raised by the assessee before the CIT(A) may not be necessary because the assessee will be falling within the safe harbour 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 comparabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... position provided such change is bonafide, does not cause prejudice to the vested rights of others and when such change is not expressly prohibited by law. There are several Tribunal judgments holding that the assessee is not bound by its Transfer Pricing study report. 2.1.5 In this case, the Appellant is a loss making company. It has contended that it will turn in to profit making company, if selfadjustment sought on account of extra-ordinary expenditure is permitted. The Appellant has sought self-adjustment on account of incurring of certain expenditure, which in its opinion are extra-ordinary items. I find that the Appellant has not proved correctness of the expenditure before the learned TPO. The learned TPO in para 6.4 of his order has recorded his finding that the Appellant has neither produced any documentary evidence to substantiate claim nor has made any such comment in the tax audit report 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 nat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see submits that 3 companies namely Coral Hubs ltd. (Formerly Vishal Information Technologies Ltd.), Crossdomain Solutions Ltd. and e4e Healthcare Solutions Ltd. (Formerly as Nittany outsourcing Services Pvt. Ltd.) as selected by the Transfer Pricing Officer (TPO) are not comparable with the assessee company and these companies should be rejected as comparables while determining the Arm's Length Price (ALP). 2] The Ld. CIT(A) erred in confirming the Operating Profit Margin computed by the Ld. TPO at (-) 21.01% as against the Operating Profit margin of (+) 22.05% computed by the appellant in its Transfer Pricing Study Report after making certain adjustments. 2.1] The Ld. CIT(A) erred in rejecting all the adjustments made by the appellant while computing the operating cost as well as operating profit without giving any concrete or rational justification for rejecting the same. 2.2] The Ld. CIT(A) failed to appreciate 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 com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the learned Commissioner of Income-tax (Appeals) may be vacated and that of the Assessing officer be restored. 7. The appellant craves leave to add, amend, alter or delete any of the above grounds of appeal during the course of the appellate proceedings before the Hon ble Tribunal. 15. So far as ground of appeal No.1 is concerned, the Ld. Counsel for the assessee submitted that the AO has selected 4 companies as comparables out of which 3 companies are not at all comparable with the assessee company. So far as Coral Hubs Ltd. is concerned, he submitted that the employee cost is the main item of expenditure in the line of business carried out by the assessee company. However, in the case of Coral Hubs Ltd. the employee cost is hardly 3% which is evident from page 206 of the paper book. He submitted that the turnover of Coral Hubs Ltd. has increased from ₹ 38.07 crores to ₹ 61.73 crores while its employee cost has increased marginally from ₹ 1.11 crores to ₹ 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 Be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn at ₹ 1,22,28,432/- as against the turnover of ₹ 61,08,57,165/-. Further, the turnover has gone up from ₹ 38.08 crores in F.Y. 2007-08 to ₹ 61.09 crores in financial year ending 31-03-2009. However, the employee cost has gone up from ₹ 1.11 crores to only ₹ 1.22 crores. The submission of the Ld. Counsel for the assessee that the related party transactions of the above company is more than 25% could not be controverted by the Ld. Departmental Representative. Further, the notes forming part of accounts for the year ended 31-03-2009, copy of which is placed at pages 213 and 214 of the paper book (page 75 and 76 of the annual audited accounts) show that the related party transactions are more than 25%, the details of which are given as under : 9. Related party Transactions Name of the Party Country holding As at 31-03-2009 As at 31-03-2008 Basiz Fund Service Pvt. Ltd. India 86.84% 86.92% Tutis Digital Publishing Pvt. Ltd. India 79.37% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ionally dissimilar to a concern engaged in rendering of BPO services (ITES). The following discussion in the order of the Tribunal in the case of PTC Software (India) Private Limited (supra) has been rendered to :- 45. We have heard the rival contentions and perused the record. In the TP study carried out by the TPO in the ITES segments, fresh search criteria were applied by the TPO and list of comparables which were not selected by the assessee were picked up in the TP study and the margins of the said comparables were applied to determine the arm s length price of the transactions of the assessee in ITES segments. The assessee was aggrieved by the selection of the said comparables and the plea of the assessee was that in case said comparables were not included in the TP study, the margins shown by the assessee would be at arm s length. The first comparable referred to by the learned Authorized Representative for the assessee was M/s. Vishal Information Technologies Ltd. The said company was providing IT enabled services and was also engaged in other diversified activities. Further, it has outsourced its services to third party vendor and acted as intermediary between the fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rized as an IT-Enabled services concern, the same is liable to be included. 31. We have carefully considered the rival submissions on this aspect. At the outset, we may refer to page 810 of the Paper book, wherein the Notes to Accounts for the year ended 31.3.2007 of the said concern have been placed. As per the available information, the said concern has related party transactions as reported by the concern at para 7 of the said Notes at 86.92%, which breaches the RPT filter. Furthermore, the functional profile of the said concern brought out by the assessee also reveals differentiation in the activity profile. The TPO, in our view, has not appreciated the qualitative difference in the functions performed by the said concern as sought out to be brought out by the assessee. Considering the aforesaid, we therefore, find that the assessee was justified in ascertaining that the said concern be excluded from the list of comparables for the reasons canvassed. Thus, on this aspect assessee succeeds. 46. The Tribunal in the assessee s own case had held that the said concern was found to be operating in different functional environment and the same was excluded for the purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ind that M/s Wills Processing Services (India) Pvt. Ltd. (supra) was a concern where the tested party was providing IT enabled services to its various group concerns and activities were quite similar to the activity of IT enabled services rendered by assessee to its affiliates. In this context, the concern, M/s Crossdomain Solutions Ltd. was found to be functionally not comparable by the DRP and such decision was affirmed by the Tribunal by making the following discussion :- 3. M/s Crossdomain Solutions Ltd. This company has been rejected by the DRP on the ground that it is indulged in high skill IT services which are not comparable to the routine I.T. Enabled services. The Tribunal Hyderabad Bench in the case of M/s Market Tools Research Pvt. Ltd. in ITA No.1811/Hyd/2012 has held that this company is providing services which are in the nature of KPO. Further, the company is engaged in providing Niche services as well as developed its own brand Exdion to target the insurance industry in US. The Tribunal followed the findings of the Bangalore Bench in the case of M/s Symphony Marketing Solutions India Pvt. Ltd. in ITA No.1316/Bang/2012 while rejecting the issue of this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed by the assessee is with regard to the denial of adjustment in respect of extraordinary/non-operating expenses. He submitted that the lower authorities have erred in not allowing the adjustment on account of various expenses on the ground that these are not extraordinary/non operating expenses. So far as the expenses in relation to raising of finance and buyback is concerned, he submitted that the assessee has incurred these expenses on account of GDR issue, buyback of shares, restructuring options like ESOP etc. The total expenses on these items which were claimed as nonoperating is ₹ 1,02,17,339/-. 27. Referring to page 138 of the paper book the Ld. Counsel for the assessee drew the attention of the Bench to Annexure-1 containing such expenses which total to ₹ 1,02,17,339/-. He submitted that the assessee had paid an amount of ₹ 10,56,766/- to J.M. Financial Consultants Pvt. Ltd. for Consultancy of buyback issue. Referring to pages 141 to 145 of the paper book the Ld. Counsel for the assessee drew the attention of the Bench to the relevant agreement with JM Financials Consultants Pvt. Ltd. and the invoices raised by them. He submitted that an amount of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assigned on this project however continued with a hope to get some alternate project. Since no new projects were received, therefore, the assessee considered salary expenses of these employees amounting to ₹ 19,35,527/- as extraordinary item. Referring to page 139 of the paper book he drew the attention of the Bench to the details of such salary expenses of employees of accounting and MIS Division. Referring to pages 187 to 189 of the paper book he drew the attention of the Bench to the reply given to the AO on this issue. 31. So far as salary expenses of software team is concerned he submitted that various employees were working on software projects. However, these projects were terminated and the cost incurred, which was capitalized in the books till earlier year, was debited to the profit and loss account. Referring to page 140 of the paper book he drew the attention of the Bench to the total expenditure at ₹ 68,35,875/-. He submitted that till earlier year these expenses were treated as capital work in progress and the same is evident from the schedule of fixed assets given at page 11 of the paper book. He submitted that instead of capitalizing in the book the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... increased from ₹ 2.34 crores in A.Y. 2008-09 to ₹ 3.72 crores in A.Y. 2009-10. Thus on one hand, the turnover of the assessee has reduced substantially in this year while on the other hand the employee cost and other expenses have increased. He accordingly submitted that the order of the CIT(A) on this issue be reversed and the operating profit of the assessee company be computed by excluding these extraordinary items. 34. The Ld. Departmental Representative on the other hand heavily relied on the order of the CIT(A). 35. 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. We find the assessee in the instant case is engaged in providing ITES enabled services and is a 100% EOU and is entitled for deduction u/s.10B in respect of its profits. The assessee filed its return of income declaring loss of ₹ 2,68,14,081/-. The assessee is into providing BPO services to its AEs to the tune of ₹ 3,88,38,097/- and has adopted TNMM for determining the Arms Length Price. The assessee had considered its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fund claim written off is concerned, we find the assessee in the said latter has also given its justification. Similarly, at page 99 of the paper book, the assessee had also clarified before the CIT(A) regarding the exclusion of such expenditure for computing the operating margin. Similar is the case with the salary expenses of accounting and MIS process and the salary expenses of software team. 39. We find merit in the submission of the Ld. Counsel for the assessee that the expenditure incurred on account of GDR issue, buyback of shares and restructuring options like ESOP etc. amounting to ₹ 1,02,17,339/- should be considered as nonoperating expenses while determining the operating margin of the assessee. Similar is the case with rejected tax refund claim written off since the said expenditure was not related to providing of services to its AEs. As regards the expenses of accounting and MIS process is concerned, we find because of termination of certain projects by the customers, the assessee, on the hope of getting some alternate projects retained its employees assigned to those projects. Since no new projects were received, the salary cost of these employees amounting t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ving at the ALP of the international transaction. The case made out by the income tax department was that since the assessee is a captive unit of its associated enterprise, it was actually the latter which undertook the entire risk, that the associated enterprise was paying the assessee at the rate of cost plus 10 percent that if the Indian units are closed then the operating costs would correspondingly be reduced and therefore, the compensation paid would form part of the operating costs and would thus be relevant for arriving at the ALP. 18. The aforesaid issues were considered by the Tribunal. It noted that despite a specific direction issued by the CIT(Appeals), the assessee was unable to adduce any documentary evidence to show that the decision to close the Indian units was taken by the assessee independently and without being influenced by the associated enterprise. The Tribunal thus appears to have doubted the assessee's claim that it was an independent decision, taken without consulting the associated enterprise, to close down the Indian offices. The Tribunal further agreed that the stand taken by the revenue authorities that the closure of the Indian branches would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ightly pointed out by the counsel for the assessee, the assessee is being compensated by a fee or commission which has no connection with the costs incurred. This has been referred to even in the assessment order at paragraph 6.3 as follows:- For the agency and market support services, MIPL has received two kinds of remuneration. a. handling commission - which varies from transaction to transaction and depends on the product, volume etc.; (during the proceedings the assessee was asked to give transaction wise break up of commission received but inability in this regard was expressed as it was stated that the transactions were numerous and could not collated); b. Services fees - fixed fees for rendering marketing support in form of market survey etc. The CIT (Appeals) proceeded to decide the issue on the basis that the assessee was unable to produce any document to show the circumstances under which the decision to close the offices was taken. He also assumed that the relevance of the closure of the Indian units and the payment of compensation both would hinge upon as to whose decision it was to close down the Indian units. He held that the decision was taken at the be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Since the assessee in the instant case has given full details of the various expenses justifying its treatment as non-operating expenditure, therefore, considering the totality of the facts of the case and in the light of the decisions cited above, we hold that the assessee was fully justified in adjusting the above expenses for computing its operating margin. Therefore, we set aside the order of the CIT(A) on this issue and direct the AO to compute the operating margin of the assessee company by adjusting the above expenses. Grounds raised by the assessee on this issue are accordingly allowed. 43. So far as ground of appeal No.3 is concerned the same relates to non granting of working capital adjustment in respect of comparable companies selected by the TPO. 44. After hearing both the sides, we find the different Benches of the Tribunal are consistently taking the view that adjustment on account of working capital should be provided. Although this ground was raised before the CIT(A) he has not adjudicated the issue. We find the Pune Bench of the Tribunal in the case of Ariston Thermo India Ltd. reported in 36 taxmann.com 501 at para 19-21 of the order has observed as under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In our opinion, if a company satisfies the FAR analysis the same should be included and only because it has incurred loss cannot be a ground to reject the same. The various decisions relied on by the Ld. Counsel for the assessee supports its case. The Hon ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt. Ltd. reported in (2015) 56 taxmann.com 417 has held that mere fact of an entity makes high/extremely high profit/loss does not ipso facto lead to its exclusion from the list of comparables for purposes of determination of ALP. Similar view has been taken by the Pune Bench of the Tribunal in the case of Cummins Turbo Technologies Ltd. (Supra). The Tribunal at para 13 and 14 of the order has observed as under : 13. We have also heard the Ld. DR. We find force in the argument of the Ld. Counsel. We find that the data base adopted by the assessee for selecting the comparables can be tested on FAR and there is likely to be some difference. Merely because some loss making companies are there those cannot be straightly rejected as com parables unless the abnormal loss is projected. As the same way, super profit comparables also should not be included. ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
