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TMI Blog2016 (3) TMI 1205X X X X Extracts X X X X X X X X Extracts X X X X ..... concerned expenses, which are required to be reduced from the export turnover as per clause (iv) of the Explanation to Section 10B to be reduced from the total turnover also. 4) The Ld.CIT(A) ought to have considered the fact that the jurisdictional High Court decision relied upon by him has not been accepted by the department and a SLP has been filed before the Hon'ble Supreme Court which is still pending. 5) The learned CIT(A) erred in holding that the size, turnover of the company are deciding factors for treating a company as a comparable, and accordingly erred in excluding Wipro BPO Solution Ltd and Sutherland Global Services Pvt. Ltd., as comparables in the segment. 6) The Ld CIT(A) erred in excluding the comparable companies: Mercury Outsourcing Management Ltd., and Flextronics Software Systems Ltd on the basis of abnormal loss Without defining what constitutes abnormal loss filter and how the same is determined. 7) The Ld. CIT(A) erred in directing the inclusion of M/s Pentasoft Technologies Ltd. as an appropriate comparable rejecting the diminishing revenue filter used by the TPO to exclude companies that do not reflect the normal industry trend. 8) The CIT(A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l the filters applied by the TPO for the purposes of comparability analysis. 16) For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the CIT(A) be reversed and that of the Assessing Officer be restored. 17) The appellant craves leave to add, to alter, to amend or delete any of the grounds that may be urged, at the time of hearing of the appeal." 3. Briefly facts of the case are that the respondent-assesseecompany is a company incorporated under the provisions of the Companies Act, 1956. It is a subsidiary of M/s.Speedera Network, Inc., USA. It is engaged in the business of providing back office support services which includes voice/non-voice based technical support services, invoice processing, accounts receivable and collection processing etc., to its holding company. The respondent assessee-company is remunerated by its holding company on a cost plus 10% basis for the services rendered. 4. Return of income for the assessment year 2005-06 was filed declaring total income of Rs. 27,680/-. The respondentassessee- company also reported the international transaction of Rs. 5,43,38,993/- being the consideration received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2CA(3) of the IT Act, 1961 computed the transfer pricing adjustment at Rs. 63,81,562/-. The TPO accepted the TNMM adopted by the respondent-assesseecompany but rejected the transfer pricing study report. The TPO proceeded to identify a different set of comparable entities for the purpose of determining the ALP. While doing so, the ld. TPO had applied the following filters:
a. Companies whose turnover while doing so, X X X X Extracts X X X X X X X X Extracts X X X X ..... , the ld.CIT(A) had not accepted the contention of the respondent-assessee-company that the business model of the comparable is different from that of the respondent-assessee-company. Therefore, the ld.CIT(A) upheld the action of the TPO in including this company as a comparable. The Nucleus Netsoft & FIS Ltd., the comparable selected by the TPO was directed to be excluded from list of comparables on the grounds of functional dissimilarities. The comparable viz., Maple E Solutions Ltd., was also directed t be excluded from the list of comparables selected by the TPO, as the reputation of the ground was under serious indictment. The ld.CIT(A) also directed the inclusion of M/s.Apex Advanced Technology Ltd., Finally, the ld. CIT(A) computed the arithmetic mean of operating margins of the comparables finally as follows:
Sl. No.
Company Name
OP/TC %
1
Ace Software Exports Ltd.
14.50
2
Allsec Technologies Ltd.
26.19
3
Apex Advanced Technology Ltd.
14.16
4
Cosmic Global Ltd
17.02
5
Pentasoft Technologies Ltd.
7.85
6
R Systems International Ltd.
8.12
7
Safron Global Ltd.
24.88
8
Transworks Information Services Ltd.
2.81
9
Vishal Information Technologies Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n'ble Bombay High Court in the case of CIT vs.Pentair Water India Pvt. Ltd. (381 ITR 216) had held that the turnover was a relevant factor for the purpose of comparability of two entities. However, without going into this issue, as rightly submitted by the learned AR of the respondentassessee- company, it was held by the co-ordinate benches of Hyderabad and Mumbai benches in the cases cited supra, Wipro BPO Solutions Ltd., cannot be considered as a comparable entity in view of the fact that it is gigantic company owning intangibles and having substantial brand value. Co-ordinate bench (Hyderabad) of the Tribunal, in the case of M/s.Market Tools Research Pvt.Ltd., (supra) held as follows:
"20. It is a fact that WIPRO BPO is a big company owning intangibles and having substantial brand value. It had generated considerable goodwill, reputation and brand value in the market. It is also a fact that it earns substantial revenue from products which are sold at a premium unlike the assessee which is only a contract service provider to its AE. Another relevant factor which cannot be lost sight of is, as can be seen from para 14.5 of his order, the TPO applying the turnover filter has excl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he diminishing revenue cannot be accepted as a filter and directed the TPO to include this company in the list of comparables.
12.1 Ld.AR of the respondent-assessee-company drawn our attention to page 215 to 260 of the paper book which contains the Annual report for 2004-05 and specific attention was drawn to page 221 of the paper book which highlights the business performance of the company, which is as under:
"2. Business Performance:
The total income for the financial year ended 31st March 2005 is Rs. 55.94 Crores as compared to Rs. 101.69 Crores for the previous year. The net profit stood at Rs. 2.51 Crores compared to previous year figure of 2.34 Crores. Your company was able to maintain the net profit at the same level as that of last year even though there has been substantial fall in revenue due to several cost cutting measures and improved margins in the business undertaken by the company.
During the year under review the company has gone for acquisition of new products rights to strengthen its software products division. Besides these, the company has also undertaken several short-term training courses for companies and educational institutions resulting in healt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nuum India Pvt. Ltd. In ITA No.1154/Hyd/2011 dated 24/10/2013 wherein it has been held as under:
"13. We have heard both the parties and perused the material on record. In our opinion, this issue was considered by the Tribunal in the case of DCIT vs. Hellosoft India Pvt. Ltd. (ITA No.640/Hyd/2009 dated 15/1/2013) wherein it was held that companies having extraordinary high profit/loss cannot be considered as comparables. Being so, the companies having extraordinarily high profit or loss are to be excluded as comparables.
14.4 The decision of the Hyderabad bench of Tribunal in the case of BA Continuum India Pvt. Ltd. (supra) is based on the decision of Sapient Corporation Pvt.Ltd. vs. DCIT (11 Taxman.com 69)(Del). Subsequently, the co-ordinate (Bangalore) bench of the Tribunal in the case of Trilogy EBusiness Software India Pvt. Ltd. (140 ITD 540)(Bang.) held that there is no bar to considering companies having abnormal losses or profits as comparable as long as they are functionally comparable. The Tribunal however, held that if there are specific reasons for abnormal profits or losses or other general reasons as to why they should not be considered as comparable, then they can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... list of comparables on functionality differences.
14.5 We heard rival submissions and perused the material on record. The respondent-assessee-company had not filed any evidence in support of the functions carried out by the comparable. For the purpose of comparability, analysis of FAR is sine qua non, in the absence of the same on record, we are unable to render any finding on this aspect of the argument. Therefore, we are unable to agree with the finding of the ld.CIT(A) that this company should be excluded from the list of comparables even on the ground of functional dissimilarity. We direct the AO to include this company in the list of comparables. These grounds of appeal of the Revenue are allowed.
15. Ground No.13 challenges the direction of the ld.CIT(A) directing the TPO to delete M/s.Maple e Solution Ltd., from the list of comparables. This comparable was chosen by the TPO and the ld.CIT(A) deleted from the list of comparable accepting the contention of the respondent-assessee-company that the company operated for a period of 4 months and the group to which the company belongs is under serious indictment and following the decision of the Delhi bench of Tribunal in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clusion that it cannot be a comparable to the respondent-assessee-company. Therefore, the ld.CIT(A) directed the AO to include this company in the list of comparables.
16.1 The ld. DR vehemently argued that this company cannot be treated as a comparable as the main business of the company is export of computer software. On the other hand, ld. AR of respondent-assessee-company relied upon the orders of the ld.CIT(A).
16.2 We heard the rival submissions and perused the material on record. It is undisputed fact that the TPO had considered the financials of a different company. Therefore, he had no occasion to examine the FAR of this comparable. We are of the considered opinion that the interest of justice would be met if this ground is restored to the file of TPO for fresh analysis of FAR of this company and then come to the conclusion whether this can be considered as a comparable or not. Hence, this ground of appeal of revenue is partly allowed for statistical purposes.
17. In the result, the appeal of the revenue is partly allowed.
18. The cross objection filed by the assessee-company is only in support of the order of the ld.CIT(A) and no fresh relief is sought for. Hence, the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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