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TMI Blog2018 (1) TMI 238X X X X Extracts X X X X X X X X Extracts X X X X ..... ("Ld. TPO") for the international transaction pertaining to provision of IT enabled services (hereafter referred to as "impugned transaction")in his order passed under section 92CA(3) of the Act on the following grounds: Each of the ground is referred to separately, which may kindly be considered independent of each other. 1 That on facts and in law, the Ld. AO/TPO/CIT(A) have erred on facts and in law, by alleging that the Appellant is engaged in nonroutine, "high-end" services while failing to appreciate the risk-free and routine nature of the activities performed by the Appellant. In doing so, they have grossly erred in: 1.1 incorrectly characterizing the Appellant as a high-end service provider without conducting a proper Functional, Asset and Risk ("FAR") analysis of the international transactions; and 1.2 not considering that the Appellant in engaged rendering in routine coordination, administrative and Information Technology ("IT") enabled services to its AEs. 2. That on facts and in law, the Ld. AO/TPO/CIT(A) have erred in making an addition of INR13,318,981 to the returned income of the Appellant on account of alleged difference between the Arm's Length ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n companies to the final set of comparables for the impugned transaction on an ad-hoc basis. The TPO has resorted to cherry picking of comparables to determine ALP for the impugned transaction without due cognizance to the FAR profile of the Appellant vis-a-vis the companies selected as comparable. 2.8 by selecting certain companies which are themselves controlled, having significantly high related parties transactions in excess of 25% of the sales. 2.9 by selecting certain companies which are earning super normal profits as comparable to the Appellant. 3. That on facts and in law, the Ld. AO/TPO/CIT(A)have failed to make appropriate adjustments to account for varying risk profile of the Appellant, which is a captive contract service provider, vis-avis the comparables. In the process, they have also neglected the Indian TP regulations, OECD guidelines on TP and judicial precedence. 4. That on facts and in law, the Ld. AO/TPO/CIT(A)have erred in incorrectly computing the operating margins of the companies selected as comparables by considering provisions for doubtful debts, miscellaneous expenses, bank charges, provision for foreign exchange derivative loss written back ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 43(2) of the Act was issued and complied with. The Assessing Officer noticed international transactions carried out by the assessee with its associated enterprises (AEs) and referred determination of arm's length price of those international transactions to the Ld. Transfer Pricing Officer (TPO). The Ld. TPO proposed adjustment of Rs. 1,33,18,981/- to the income vide his order dated 31/10/2011. The Assessing Officer passed a draft assessment order on 08/12/2011. Since the assessee did not prefer to file objections before the Ld. Dispute Resolution Panel (DRP) against the draft assessment order within the stipulated period, the Ld. Assessing Officer passed the final assessment order under section 143(3) r.w.s. 144C of the Act assessing the total income at Rs. 2,75,65,860/-. Aggrieved with the transfer pricing adjustment, the assessee preferred appeal before the Ld. CIT-(A), who partly allowed the appeal of the assessee. Aggrieved with the finding of the Ld. CIT-(A), the assessee and the Revenue, both are in appeal before the Tribunal raising the respective grounds as reproduced above. 4. At the outset, the Ld. counsel of the assessee referred to the application filed for condonatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s summarized by the Ld. TPO in his order are reproduced as under: No. Nature of transaction Method Value of transaction 1. Provision of collection co-ordination and technical support services TNMM 82,304,290/- 2. Collection on the behalf of AE CUP 104,175,401 3. Reimb. Of cost by AE TNMM 178,836 4. Reimb. Of cost to AE CUP 902,357 6.3 The Ld. TPO accepted the arm's length price of the international transaction except the transaction of support services. 6.4 The assessee for computation of arm's length price of the transaction of support services applied Transactional Net Margin Method (TNMM) taking Operating Profit to Total Cost (OP/TC) as Profit Level Indicator (PLI). The PLI of the company is arrived at 15% on cost whereas the average PLI of the comparables is arrived at 15.38%. The PLI of the comparables has been arrived at by considering the data for financial year 2005-06, 2006-07 and 2007-08. 6.5 The assessee selected following comparables in its transfer pricing study without making adjustment for working capital or risk: Sl. No Name of comparable Weighted Average OP/ TC (%) 1. Ace Software Exports Ltd. 20.59 2. Aftech ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of multiple year data for computing PLI. The Ld. CIT-(A) upheld exclusion of comparables, namely, Allsec Technologies Ltd, Ace Software Ltd. and MCS Ltd. The Ld. CIT-(A) accepted objection of the assessee for inclusion of the Acentia technologies Ltd, Coral hubs Ltd, Mold-Tek technologies Ltd and HCL Comnet Systems and Services Ltd. and directed the Ld. AO/TPO to exclude these from the list of final comparables. 6.12 The assessee also requested for exclusion of e-Clarx Services Ltd. from the list of final comparables, but in view of the fact that it was considered by the assessee itself as comparable, the Ld. CIT-(A) directed to retain the company as comparable in the final set of comparables. 6.13 The finding of the learned CIT-(A) on the issue of comparables is reproduced as under: "6.5 As discussed above, the AO/TPO is directed to exclude HCL Comnet Systems & Services Limited, Mold-Tek Technologies Limited, Coral Hubs Limited and Accentia Technologies Limited from the final set of the comparables. The rest of the comparables as used by the TPO should be retained. The TPO/ AO is directed to treat the loss on sale of fixed assets as non-operating in nature for the comparables ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee and the AE and submitted that trademark/intellectual property generated in the process was to be transferred to the AE without any remuneration. He submitted that normal BPO cannot generate intellectual property and therefore, the assessee cannot be categorized as BPO. The Ld. CIT(DR) further submitted that the acquisition process has not affected the PLI of the company and therefore, there is no impact of extraordinary event during the year under consideration. In view of the arguments, the learned CIT(DR) requested for retaining the company in the final set of comparables. 7.4 The Ld. counsel in the rejoinder submitted that all information in respect of the FAR analysis of the assessee was already submitted before the learned TPO and a copy of which was also available in the pages 420 to 422 of the paper book . 7.5 We have heard the rival submission and perused the relevant material on record. The assessee submitted details of services rendered to its AE as under: * Coordination and liaisoning between test centres and NCS US. * Provide IT enabled support services on phone and on ground, to test centres to ensure smooth functioning of the tests. * Resolve technical pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plex client needs. We are sometimes compared to a BPO or an IT off shoring company, which we are not. We are a data analytics KPO service provider specializing in two business verticals - Financial Services and Retail and Manufacturing. We provide solutions that do not just reduce cost, but help our clients increase sales and reduce risk, by enhancing efficiencies and by providing valuable insights that empower better decisions." 7.9 It is evident from above that the company is engaged in high-end KPO activities and functionally dissimilar to the assessee. 7.10 Further, according to the page 14 of the annual report for financial year 2007-08, which is reproduced as under, the company has acquired a UK-based company: "Acquisitions made during the year eClerx has acquired UK-based Igentica Travel Solutions Limited ("ITS") on July 27, 2007. This acquisition is consistent with the Company's strategy of looking for inorganic growth via "bolt on" acquisitions which fit well with the existing strengths of the Company. ITS has provided the Company with a set of 28 large customers, primarily in Europe, thus strengthening the Company's presence in that geography. It has a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the purposes of rendering KPO services. As the assessee is a captive unit rendering services to its AEs without any intangibles, there can be no comparison between the assessee and Eclerx Services Pvt. Ltd. We, therefore, order for the exclusion of this company from the final set of comparables." 31. So, when the taxpayer is a routine ITES i.e. low end service provider, it cannot be a suitable comparable with Eclerx which is a KPO providing data analytics and data process solutions to global enterprise clients and it is having significant intangibles to the tune of 7.24%. So, high end KPO cannot be compared with low end routine ITES service provider. Eclerx also provides sales and marketing support services to leading global manufacturing, retail, travel and leisure companies through its pricing and profitability service which makes it functionally dissimilar with the taxpayer. So, in view of the matter, we order to exclude Eclerx from the final set of comparables. 7.14 In view of above discussion, we direct the Ld. AO/TPO to exclude above company from the final set of comparables. 7.15 Thus, ground No. 2.7 of the appeal of the assessee is allowed. Acentia Technology Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hnologies Ltd., in the proceedings relating to the assessment year 2008-09, has observed in the following manner......11. On care careful consideration of the matter, we also agree with the aforesaid view of the DRP that extra-ordinary event like merger and de- merger will have an effect the profitability of the company in the financial year in which such event takes place. It is the contention of the assessee that in case of the aforesaid company, there is amalgamation in December, 2006, which has impacted the financial result. This fact has to be verified by the TPO. If it is found upon such verification that the amalgamation in fact has taken place, then the aforesaid comparable has to be excluded." The appellant has submitted that Accentia should be rejected as a comparable. I have carefully considered the submission of the appellant and also gone through the order of the TPO. Considering the facts of the case, I hold that Accentia Technologies Limited is not a proper comparable as no segmental information is available and extraordinary events like merger and de-merger has taken place in this case. Accordingly, the AO/TPO is directed to exclude this company from the final set o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es etc. for Rs. 21.82 crores (i.e. 87 percent of its total expenditure) evidencing that the company has outsourced most part of its work and has not provided the services itself. The appellant has stated that the business model of CORAL is different from that of the appellant since the company outsources its work and therefore, is functionally dissimilar to the business undertaken by the appellant. The appellant has relied on the decision of the Hon hie ITAT in the case of Maersk Global Service Center India Private Limited (ITA No. 3774/MUM/2011) wherein it has been held that "48. Insofar as the cases of Tulsyan Technologies Limited and Vishal Information Technologies Limited are concerned, it is noticed from their annual accounts that these companies outsourced a considerable portion of their business. As the assessee carried out entire operations by itself, in our considered opinion, these two cases were rightly excluded " The appellant has also relied on the decision of the Hyderabad bench of Hon'ble ITAT in case of M/s Capital IQ Information Systems (India) Pvt. Ltd Vs DCIT (ITA No. 1961/Hyd/2011 and other case laws. Considering the facts of the case, I hold that Coral Hubs Lim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T [2014] 43 taxmann.com 100 (Mumbai - Trib.) (SB) the Special Bench of the Hon'ble ITAT Mumbai has held that *In so far as the case of Mold-Tek Technologies Ltd. is concerned, it is observed from the annual report of the said company for the financial year 2007-08 placed at page 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 Mold-Tek Technologies Ltd. available on their Website is furnished in the form of printout at page 158 to 165 of the paper book and a perusal of the same shows 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 team of skilled resources with world class resources and skill sets. It is also stated to have consistently helped the clients to cut down design and development costs of civil, structural, mechanical and plant design by 30-40% and delivered technologically superior outputs to match and exceed expectations. It is claimed to have inhouse software developmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 'M/s. Tech-men Tools Private Limited' merged with assessee company and Mold-tek Plastic Limited demerged from the assessee company during the year under consideration. In view of this extraordinary event also, this company cannot be compared with assessee company. In view of the above facts, we do not find any infirmity in the finding of the Ld. CIT-(A) on the issue in dispute in directing the Ld. AO/TPO for excluding the above company from the final set of comparables. 10.4 The ground of the Revenue in relation to the three companies is accordingly dismissed. 11. The ground No. 5 of the appeal of assessee relates to not allowing appropriate adjustment to account for differences in working capital employed by the assessee as well as companies selected as comparable. 11.1 The Ld. CIT-(A) rejected objection of the working capital adjustment with his observation as under: 6.7 The appellant has also objected to the rejection of its claim for the working capital adjustments. Working capital adjustments are difficult to apply due to the lack of accurate and reliable data. In absence of reliable financial data, it is difficult to apply working capital adjustments. Apart from the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard the rival submission and perused the relevant material on record. We find that the Tribunal in the case of Mercer Consulting (India) Private Limited (supra) on the issue of working capital adjustment has observed as under: "16.2 Having heard the rival submissions and perused the relevant material on record, we find that the viewpoint canvassed by the authorities below is sans merit. Working capital adjustment is ordinarily confined to inventory, trade receivables and trade payables. If a company carries on high trade receivables, it would mean that it is allowing its customers a relatively longer period to pay their amount which will result into higher interest cost and the resultant less profit. Similarly, by carrying high trade payables, a company benefits from a relatively longer period available to it to pay back its suppliers which lowers the interest cost and accelerates profits. To have a level playing field, it is sine qua non that the working capital adjustment should be carried out to bring two otherwise comparable cases at par with each other. We are unable to comprehend any reason or rhyme to restrict the grant of working capital adjustment only in the case of man ..... X X X X Extracts X X X X X X X X Extracts X X X X
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