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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 ..... y craves leave to prefer an appeal against the assessment order passed under section 143(3) r.w.s. 144C of the Income-tax Act, 1961 ( the Act ) by Deputy Commissioner of Income- tax - (OSD), CCIT -V, New Delhi ( Ld AO ), after considering the adjustment proposed by the Additional Director of Income Tax, Transfer Pricing Officer 11(1) ( 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; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gnificantly high turnover. 2.6 in rejecting certain comparable companies identified by the Appellant as affected by peculiar economic circumstances (e.g. mergers and acquisitions, companies which showed a diminishing revenue trend) and yet selecting/ upholding companies affected by similar peculiar economic circumstances as comparables in the TP Order. 2.7 by wrongly rejecting certain companies and adding certain 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, v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es to effectively carry out online test in India, the NCS, US contracted with various thirdparties in India to act as testing centre(s). The assessee provides administrative assistance and other services to the parent company in carrying out their contractual obligations. 3.1 The Assessee company filed return of income for the year under consideration on 31/08/2008 declaring income of ₹ 1,42,46,880/-. The case was selected for scrutiny and notice under section 143(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 ₹ 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. 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctivities as provision of coordination, liasioning, administrative support and other Information Technology (IT) enabled support services for smooth functioning of the test in India. According to the assessee, the services fall under the ambit of IT enabled services (ITes), which are rendered to its AE as an independent contractor and for which it is compensated on the cost plus markup basis of 15%. 6.2 The international transactions undertaken by the assessee with its associated enterprises as 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 Aditya Birla Minacs Worldwide Ltd. - 3.99 3 Caliber Point Business Solutions Ltd. 10.97 4 Cosmic Global Ltd. 23.3 5 CSS Technergy Ltd. 26.28 6 Eclerx Services Ltd 65.88 7 HCL Comnet Systems Services Ltd. 37.99 8 Maple Esolutions Ltd 20.73 9 Mold-Tek Technologies Ltd 96.66 10 R Systems International Ltd. (Seg.) 10.34 11 Triton Corp Ltd 23.5 12 Vishal Information Technologies Ltd 50.68 Average 33.61 6.7 The Ld. TPO also rejected the contentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 as well as for the appellant. The TPO/ AO is directed to re-workout the mean OP/TC of the comparables by making the above changes. The difference of arm s length should be calculated accordingly. The adjustment to the international transaction is subject to the discussion in the subsequent paragraph of this order on the applicability of + /-5% as per proviso to section 92C(2) of the IT Act. 6.14 Further, the Ld. CIT-(A) rejected the contention of the assessee for allowing benefit of +/- 5% adjustment. The learned CIT-(A) also rejected claim for risk adjustment and working capital adjustment. 6.15 The exclusion/inclusion challenged by the assessee and Revenue respectively of comparables is adjudicated as under: e-Clerks Services Ltd. (ESL): 7. This company was selected by the assessee itself as comparable, however, before the Ld. CIT-(A) the assessee requested for its exclusion, which was rejected by the Ld. CIT-(A). 7.1 Before us, the learned counsel of the assessee filed a paper book containing pages 1 to 1070 and requested ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d NCS US. * Provide IT enabled support services on phone and on ground, to test centres to ensure smooth functioning of the tests. * Resolve technical problems at the test centres as per the test centres guides provided by the AEs. * Collect information on the vendors interested in operating as test centres and * Collection and remittance of fees collected on behalf of NCS US. 7.6 Further, during the year no R D expenses have been incurred leading to creation of any intellectual property. Before the Ld. TPO, the assessee submitted that majority of the operational personnel employed were either graduates or postgraduate with limited number of Engineering Graduate. 7.7 Thus, though the agreement contained a clause according to which any intellectual property created by either party or both parties pursuant to the agreement would be the property of AE, but during the year no intellectual property has been created. The services rendered by the assessee are of routine nature low-end ITes services. 7.8 On perusal of the page 2 to 4 of the annual report for financial year 2007-08 of e-Clerks Services Ltd., we find that company has categorized itself as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 also given the Company an entry platform into a new vertical - travel and hospitality, besides consolidating the Company's position in the retail and manufacturing space. 7.11 In view of this extraordinary event happened during the year the company cannot be used as comparable to the assessee. 7.12 Further, as per the page 40 of the annual report, which is fixed assets Schedule, the company owns significant intangible assets i.e. computer software, which is approximately 11% of the total assets of the company. Whereas, the assessee does not own any intangibles and merely operates as a contract service provider. Thus, it cannot be compared with the company who owns significant intangible property. 7.13 We further note that the Tribunal in ITA No. 2556/Del/2014 for assessment year 2009-10 in assessee s own case has excluded the company with following findings: 30. Undisputedly, the taxpayer is a low end BPO renderi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 . 8. Inclusion of this company was objected by the assessee on the ground that it was engaged in providing software development services as well as IT enabled services. The Ld. CIT-(A) directed to exclude this company from the final set of comparables observing as under: 6.4.1 As regards Accentia Technologies Limited ( Accentia ) , the appellant has stated that Accentia is engaged in providing software development services as well as IT enabled services to its customers. It is engaged in the business of medical transcription and software development service for the FY 2007-08.The TPO has observed that this company should be considered as a comparable because its revenue from ITES is more than 75% of total revenue. The appellant has submitted that the TPO has considered Billing and Coding as part of the ITES revenue and the revenue from ITES is only 63.80 percent and it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 of comparables. 8.1 The Ld. CIT(DR) referred to page 53 of the Ld. TPO and submitted that the Revenue of the company from ITes was 80.87% of the total revenue and thus it passed the 75% revenue filter and accordingly, the Ld. TPO was justified in including the said company as one of the comparable. He referred to page 909 of the assessee s paper book, which is part of annual report of the company, according to which the company acquired Thunga Software Private Limited , and eight-year-old medical transcription encoding company. He further submitted that Assessee did not adduce any evidence from the annual report that the merger and amalgamation has impacted the PLI of the company. According to him, the merger has not adversely impacted the company s financials. 8.2 On the contrary, learned counsel of the assessee supported the finding of the learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Limited is not a proper comparable as the business model of CORAL is different from that of the appellant. Accordingly, the AO/TPO is directed to exclude this company from the final set of comparables. 9.1 The Ld. CIT(DR) relying on the order of the learned TPO submitted that the company cannot be rejected merely on the model chosen for the its functions carried out. 9.2 The Ld. counsel, on the other hand, relied on the order of the Ld. CIT-(A). 9.3 We have heard the rival submission and perused the relevant material on record. In view of the employee cost as low as 4.39% of the operating cost, and 87% of the total expenditure for vendor payments, hire charges etc., it is evident that company has outsourced most part of its work and thus, the business model of the company is different from the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nical 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 development team, quality control training and troubleshooting facilities. M/s Mold-Tek is also rendering web design and development services with experience in turning them into an effective graphic design representation and creating dynamic and graphic rich web applications from IT specs, design prints etc. Keeping in view this information available in the annual report of Mold-Tek as well on its website, we are of the view that the said company is mainly involved in providing high-end services to its clients involving higher special knowledge and domain expertise in the field and the same cannot be taken as comparable to the assessee company which is mainly involved in providing low-end services. I am of the view that Mold-Tek Technologies Limited is functionally different fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 issue of unreliable data for the tested party, adequate financial data is not available for the comparable companies. Working capital adjustment needs to be given on the basis of daily or at least monthly average of payables, receivables and inventory and not on the basis of yearend figures. While these daily and monthly figures may be available in the taxpayer's case, the same are not available in the case of comparable companies. Further, in the case of taxpayer as well as comparable companies there are issues of segmental data. Segmental data may be available for P L account but the same may not be available for Balance Sheet items. Hence, calculation of reasonably accurate adjustments is not possible. Further, the issue of working capital w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bles, 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 manufacturers or traders. What is true for these categories of businesses, is fully true for a service provider as well. It is a different matter that in the case of service provider, no working capital adjustment would be required towards higher or lower inventory, but the same may be warranted in respect of higher or lower trade receivables/payables. Since the authorities below have rejected the assessee's contention for grant of working capital adjustment at the threshold, which in our considered opinion is not correct, we set aside the impugned order and remit the matter to the file of the TPO/AO for examining the assessee's claim for grant of working capital adjustment on merits and thereafter, allow the same, if it is available. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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