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TMI Blog2016 (8) TMI 1221X X X X Extracts X X X X X X X X Extracts X X X X ..... er are bad in law a) The final assessment order issued by the Deputy Commissioner of Income-tax, Circle 12(3) ['DCIT' or 'AO'], is bad on facts and in law, and is in violation of the principles of natural justice. Without prejudice to the above, the order issued by the AO is bad in law insofar as the fact that the AO did not issue to Swiss Re Shared Services (India) Private Limited ('the Appellant or 'the Company'), a show cause notice, as per proviso to section 92C(3) of the Incometax Act, 1961 ['the Act']. b) The AO has erred in law in making a reference to the Deputy Commissioner of Income Tax - Transfer Pricing - V ['TPO'], inter alia, since he has not recorded an opinion that any of the conditions in section 92C(3) of the Act, were satisfied in the instant case. The AO also erred in not following the provision contained in section 92CA (1) of the Act. 2. The fresh comparable search undertaken by the TPO is bad in law a) The AO/TPO erred on facts and in law in conducting fresh benchmarking analysis using non contemporaneous data and substituting the Appellant's analysis with fresh benchmarking analysis on his own conje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et 'secret data', i.e. data which was not available in public domain, in arriving at a fresh set of companies using his power under section 133(6), which is grossly unjustified. K ) The AO/TPO also erred on facts and in law in excluding the foreign exchange gain or loss while calculating the net margins of the comparable companies. 4 Erroneous data used by the AO/TPO a) The AO/TPO has erred in law in using data, which was not contemporaneous and which was not available in the public domain at the time of conducting the transfer pricing study by the Appellant. b) The AO/TPO erred in law in not applying the multiple-year data while computing the margin of alleged comparable companies as such data had an influence in determining the pricing policy of the Appellant. 5 Non-allowance of appropriate adjustments to the comparable companies, by the AO/TPO The AO/TPO erred in law and on facts in not allowing appropriate adjustments under Rule 1OB to account for, inter alia, differences in (a) accounting practices, (b) marketing expenditure, (c) research and development expenditure and (d) risk profile between the Appellant and the comparable companies. 6 Variation of 5% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustment to 'export turnover', the Honorable DRP erred in not giving a direction for making a corresponding adjustment to the 'total turnover' as well. 10 Relief a) The Appellant prays that directions be given to grant all such relief arising from the above grounds and also all relief consequential thereto. b) The Appellant craves leave to add to or alter, by deletion, substitution, modification or otherwise, the above grounds of appeal, either before or during the hearing of the appeal. c) Further, the appellant prays that the adjustment in relation to transfer pricing maters made by the ld.AO/TPO and upheld by Hon'ble DRP is bad in law and liable to be deleted". 4. The grounds raised by the revenue in its appeal no.172 (B)/2012 are as under; "1. The order of the Learned CIT(A) in so far as it relates to the following grounds is opposed to law and facts of the case. 2. The Id. CIT(A) erred in holding that telecommunication and other expenses incurred in foreign currency amounting to Rs. 79.40,977/- are to be excluded from total turnover as well whereas such exclusion is permitted to arrive at the export turnover only as per the definitions given in Sec.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the ld. CIT(A) and the assessee also accepts it. 8. Regarding third comparable i.e. M/s Vishal Information Tech. Ltd., it was submitted that this comparable was accepted by the ld. CIT(A), but the assessee is contending that this comparable should be rejected because this is not functionally comparable company. He also submitted that this company fails employees cost filter also because the employees cost is only 0.9% in this case and hence, major portion of work is out sourced by this company. 9. Regarding the fourth comparables M/s Cosmic Global Ltd., (earlier known as Tulsyan Technology), he submitted that this comparable was accepted by the ld. CIT(A) and the assessee also accepts it. 10. Regarding the fifth comparables i.e. M/s Transworks Information Services Ltd., he submitted that the ld. CIT(A) has rejected this comparable because it failed 0% RPT filter but since this company satisfies the criteria of RPT filter of 15%, the assessee has no objection if this comparable is reinstated. 11. Regarding the sixth comparable M/s Wipro BPO Solutions Ltd., it was submitted that this company was rejected as comparable by the ld. CIT(A) on this basis that this company has fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 15% RPT filter and there is no other basis pointed out by any side to reject any of these comparables. 16. Regarding M/s Wipro BPO Solutions Ltd., which was rejected by the ld. CIT(A) by applying 0% RPT filter, We find that this company fails even 15% RPT filter and therefore, we find no reason to interfere with the order of the ld. CIT(A) regarding this company. 17. Regarding M/s Saffron Global Ltd., the ld, CIT(A) has accepted the company as a good comparable and is not being objected by the assessee before us. Hence, on this aspect also, no interference is called for in the order of the ld. CIT(A). 18. Regarding M/s Vishal Information Tech. Ltd., we find that this comparable was accepted by the ld. CIT(A) but this is being disputed by the assessee before us on this basis that this company is functionally different and also fails employees cost filter because in this case, % of employees cost to revenue is only 0.9%. This is by now a settled position that a company should not be accepted as a good comparable, if employees cost to revenue is below 25%. By applying this filter, we hold that this company is not a good comparable in the present case. As per the above discussi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t any of the conditions in section 92C(3) of the Act, were satisfied in the instant case. The AO also erred in not following the provision contained in section 92CA (1) of the Act. 2 The fresh comparable search undertaken by the TPO is bad in law b)The AO/TPO erred on facts and in law in conducting fresh benchmarking analysis using non contemporaneous data and substituting the Appellant's analysis with fresh benchmarking analysis on his own conjectures and surmises. Thus the Appellant prays that the fresh benchmarking analysis conducted by the learned TPO is liable to be quashed. c)On the facts and in the circumstances of the case and in law, the learned TPO erred in not demonstrating that the motive of the Appellant was to shift profits outside of India by manipulating the prices charged in its international transactions which are a pre-requisite condition to make any adjustment under the provision of Chapter X of the Act. 3 Comparability analysis adopted by the AO/TPO for determination of arm's length price b)The AO/TPO grossly erred on facts in benchmarking the transactions of the captive Information Technology enabled (,ITeS') services of the Appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n determining the pricing policy of the Appellant. 5 Non-allowance of appropriate adjustments to the comparable companies, by the AO/TPO The AO/TPO erred in law and on facts in not allowing appropriate adjustments under Rule 10B to account for, inter alia, differences in (a) accounting practices, (b) marketing expenditure, (c) research and development expenditure and (d) risk profile between the Appellant and the comparable companies. 6 Variation of 5% from the arithmetic mean The AO/TPO erred in law in not granting the benefits of proviso to section 92C(2) of the Act available to the Appellant. 7 Deduction under section 10A of the Income-tax Act, 1961 b)On the facts and circumstances of the case, the learned AO erred in computing the deduction under section 10A of the Income-tax Act, 1961 ('the Act') at Rs. 53,633,766. c)The learned AO erred in reducing expenditure incurred in foreign currency of Rs. 5,521,806 from the 'export turnover' as expenditure having been incurred by the Appellant for rendering technical services outside India. The learned appreciate that the company is not engaged in rendering technical services outside India and therefore t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted a chart and it was agreed by both sides that the appeal of the assessee may be decided on the basis of this chart. As per this chart, 27 comparables are selected by the TPO with adjusted average mean of 28.33%. Out of these 27 comparables, the assessee is seeking exclusion of 8 comparables which are as under; 1) M/s Eclerz Systems Ltd., 2) M/s HCL Comnet Systems & Services Ltd., (Seg.) 3) M/s Infosys BPO Ltd., 4) M/s Maple E-Solutions Ltd., 5) M/s Moldtek Technologies Ltd., (Seg.) 6) M/s Triton Corp Ltd., 7) M/s Vishal Information Technologies Ltd., 8) M/s Wipro Ltd., (Seg.) 23. The ld. AR of the assessee placed reliance on the Tribunal order rendered in the case of M/s Flextronics Technologies India (P)Ltd., Vs DCIT as reported in 65 Taxmann.com 258. He submitted a copy of this Tribunal order and pointed out that the relevant para nos. of this Tribunal order in support of his contention for exclusion of these 8 comparables. These paras are ....8.1.2 to 8.7.1 & 8.8.1 which are reproduced as under; "8.1.2 We have considered the rival submissions as well as relevant material on record. We find that the company Eclerx Services Ltd. is engaged in diversified acti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce services. It is claimed that the company has a team dedicated to developing automation tools to support service delivery. These software automation tools increase productivity, allowing customers to benefit from further cost saving and output gains with better control over quality. Keeping in view the nature of services rendered by M/s eClerx Services Pvt. Ltd. and its functional profile, we are of the view that this company is also mainly engaged in providing high-end services involving specialized knowledge and domain expertise in the field and the same cannot be compared with the assessee company which is mainly engaged in providing low-end services to the group concerns. 83. For the reasons given above, we are of the view that if the functions actually performed by the assessee company for its AEs are compared with the functional profile of M/s eClerx Services Pvt. Ltd. and Mold-Tec Technologies Ltd., it is difficult to find out any relatively equal degree of comparability and the said entities cannot be taken as comparables for the purpose of determining ALP of the transactions of the assessee company with its AEs. We, therefore, direct that these two entities be exclud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from 1st July to 30th June. For the year under consideration, the financial accounts are prepared for the year ended on 30th June, 2007. Therefore, it is clear that for the financial year under consideration, only partial data are available from 1st July 2006 to 31st March 2007. At the outset, we note that an identical issue has been considered by this Tribunal in a series of decisions as relied upon by the assessee and referred (supra). In the case of Sandstone Capital Advisors (P.) Ltd. (supra), the Tribunal vide its order dated 6/2/2013 held in para 10 to 10.3 as under: "10. We have considered the rival submissions and relevant material on record. The TPO has rejected this comparable because the financial data for the Financial Year 2007-08 were not available in the public domain and hence, it was held that this company is not a suitable comparable. There is no dispute that the data furnished by the assessee are regarding the financial results as on 30.6.2007. Therefore, as far as the financial year 2007-08 is concerned, the data available were only for 3 months. 10.1 As per Rule 10B(4), the data to be used in analysing the comparability of or uncontrolled transaction with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hold that this case should from the list of comparables." Accordingly, by following series of decisions of the Tribunal on the point, we hold that this company cannot be treated as a good comparable for the purpose of determining the ALP. Hence, the AO/TPO is directed to exclude this company from the list of comparable for the purpose of determination of ALP. 8.3 Infosys Technologies Ltd. The learned AR of the assessee has referred to the Annual Report of this company at page 57 of the paper book and submitted that though this company was initially selected by the assessee, however, the assessee has raised objections against this company even before the TPO and further before the DRP. Therefore, this company functionally different and has to be excluded from the list of comparables. The learned AR of the assessee has pointed but that his company is having more than 17000 employees in comparison to only 6 employees of the assessee. Therefore, even on the parameter of the scale and strength of employees, this company cannot be considered as functionally comparable with that of the assessee. Further, he has referred to the Annual Report of the company and submitted that durin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the financial statement of PAN Financial has been merged with the company." It is clear that there was extraordinary event of amalgamation during the year under consideration. Therefore, in view of the extraordinary development of amalgamation of another company, this company cannot be considered as a good comparable for the assessment year under consideration, Apart from this, we further note that as per the segment reporting in para. 16.2.21 of Annual Report this company is providing business process management services as under: "Segment reporting The company's operations primarily relate to providing business process management services to organizations that outsource their business processes. Accordingly, revenues represented along industry classes comprise the primary basis of segmental information set out in these financial statements. Secondary segmental reporting is performed on the basis of the geographical location of customers. The accounting principles consistently used in the preparation of the financial statements are also consistently applied to record income in individual segments. These are set out in the note on significant accounting policies." T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... activity and therefore, financial statements of this company cannot be relied upon. In the case of First Advantage Offshore Services (P.) Ltd. (supra) the Tribunal has held in para. 41 as under: "41. As far as the companies Mapel ESolution Ltd and Triton Corp Ltd., the learned counsel for the assessee submitted that these two companies are to be excluded from the list of comparables, as for the relevant assessment year, they were allegedly involved in financial fraud and results of these two companies cannot be relied upon. For this purpose, the learned counsel for the assessee placed reliance upon the decision of Hyderabad Bench of the Tribunal in the case of Capital IQ Information (cited supra). On going through the said order, we find that the Hyderabad Bench of the Tribunal has considered the decision of the Tribunal at Delhi in the case of ITO v. CRM Services India Pvt. Ltd. in ITA No. 4068 of Del 2009 dated 30.06.2011 wherein it was held that the financial results of these two companies cannot be accepted as they were under serious indictment. Thus it is seen that the decision of the Tribunal in the case of CRM Services relates to assessment year 2007-08 and the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8.5.1-2 On the other hand, learned DR has relied upon the orders of the authorities below and submitted that this Co. is in the field of ITES and therefore, functionally comparable with the assessee. 8.5.3 We have considered the rival submissions as well as the material on record. At the outset, we note that functional analysis of the Co. has been examined by the Special Bench in the case of Maersk Global Centers India (P.) Ltd (supra) in paras 81 & 83 as under: "81. Insofar as the case of M/s Mold Tek Technologies Ltd is concerned, it is observed from the annual report of the said company for the FY 2007-08 placed at pp. 139 to 151 of the paper book that the said company was pioneer in structural engineering KPO services and its entire business comprised of providing only structural engineering services to various clients. Further, information of M/s Mold Tek Technologies Ltd available on their website is furnished in the form of printout at pp. 158 to 165 of the paper book and a perusal of the same shown that it is a leading provider of engineering and design services with specialization in civil, structural and mechanical engineering services. It is stated to have a strong ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficult to find out any relatively equal degree of comparability and the said entities cannot be taken as comparables for the purpose of determining ALP of the transactions of the assessee company with its AEs. We, therefore, direct that these two entities be excluded from the list of 10 comparables finally taken by the AO/TPO as per the directions of the DRP." 8.5.4 The Special Bench has examined the functional comparability of this Co. with that of ITES low-end service providing assessee and found that this Co. is rendering web designing and development of services with expertise in turning them in to effective graphics, design representative and creating dynamics and graphic rich web application from IT speces, design, prints etc. Further, this Co. was already found to be involved in providing structural engineering services coupled with extraordinary event of amalgamation and demerger. Following the decision of this Special Bench in the case of Maersk Global Centres India (P.) Ltd. (supra), Mumbai Benches of the Tribunal in the case of Lionbridge Technologies (P.) Ltd. v. ITO [2014] 151 ITD 553/48 taxmann.com 46 also took a similar view in para-7 as under: "7. By applying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... val submissions as well as relevant material on record. We note that the comparability of this company has been examined by the Tribunal in the case of First Advantage Offshore Services (P.) Ltd. (supra) which has already been reproduced in the foregoing paragraphs. This company has merged with Mold-Tek Technologies Ltd. during the year under consideration. In view of the findings in respect of Mold-Tek Technologies Ltd., we are of the opinion that this company cannot be considered as a good comparable company. 8.7 Vishal Information Technologies Ltd. (Coral Hub Ltd.) The learned AR of the assessee has submitted that this company does not qualify the employees filter of 25% adopted by the TPO. He has pointed out that this company has outsourced its activities and therefore, being a different business model to a routine ITES provider, cannot be considered as a good comparable. In support of his contention, he has relied upon the following decisions: i. Rampgreen Solutions (P.) Ltd. v. CIT [2015] 234 Taxman 573/60 taxmann.com 355 (Delhi) ii. First Advantage Offshore Services (P.) Ltd.'s case (supra) iii. Stream International (P.) Ltd.'s case (supra) iv. Gold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further submitted that the company is engaged in product development and services. However, the segmental information is not available. He has pointed out that there is a amalgamation during the year. He has relied upon the decision of co-ordinate bench of this Tribunal in case of 3DPLM Software Solution Ltd. v. Dy. CIT [2014] 42 taxmann.com 333. On the other hand, learned DR relied upon the orders of the authorities below and submitted that this company was found to be functionally similar to the ITES service provided by the assessee. 8.8.1 We have considered the rival submissions and relevant material on record. At the outset, we note that an identical issue of comparability of this company has been examined by this Tribunal in the case of GXS India Technology Centre (P.) Ltd. v. ITO [2015] 62 taxmann.com 276 (Bang. - Trib.) wherein it has been held in paras 17.2 and 17.3 as under: "17.2 We have considered the rival submissions and relevant material on record. We note that in case of 3DPLM Software Solutions Ltd. (supra), this Tribunal has considered the functional comparability of this company in paras 12.4.1 and 12.4.2 as under: 12.4.1 We have heard both parties an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We direct the TPO to consider the claim of the assessee of granting the benefit of tolerance range +/-5% as raised in ground No. 3 of the concise grounds. 24. From the above paras of this order rendered in the case of M/s Flextronics Tech. India(P)Ltd. (Supra), it is seen that these eight comparables are not good comparables in case of BPO company i.e. M/s Flextronics Tech. India(P)Ltd.,(Supra) and in the present case also, as per the assessee's profile noted by the TPO on page-2 of his order, the assessee company is engaged in providing ITES and therefore, it appears to be a BPO company and the ld. DR of the revenue could not point out any difference in facts as compared to facts in the case of M/s Flextronics Tech. India (P) Ltd., (Supra). Hence respectfully following this Tribunal order we, hold that these eight comparables should be excluded from the list of final comparables and the TP adjustment, if any, has to be made on the basis of remaining comparables as per law. We direct AO/TPO accordingly. 25. In the result, the appeal of assessee is partly allowed for statistical purpose. 26. In the combined result, the appeal of the assessee and revenue for AY: 2005-06 are partl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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