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2016 (8) TMI 1321

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..... n cannot be excluded from the operating profit for the purpose of determining arms length price. However rule of parity has to be maintained by considering the gain or loss on account of foreign exchange fluctuation in the cases of comparable also. Benefit of second proviso to sec. 92C for considering the tolerance range of + 5% - Held that:- The benefit of the proviso is available if the price of the international transaction of the assessee is within the tolerance limit of + 5% of the comparable price determined by the TPO. Accordingly, we direct the AO/TPO to consider the benefit of proviso to sec. 92C if the price of the assessee is within the tolerance range as provided in the said proviso.
VIJAYPAL RAO, JUDICIAL MEMBER, AND INTURI RAMA RAO, ACCOUNTANT MEMBER For the Appellant : P.K. Prasad and V.M. Ashankur, CA. For the Respondent : P. Chandrashekar, CIT. ORDER Vijaypal Rao, Judicial Member - This appeal by the assessee is directed against the asst. order dated 7/9/2010. passed u/s 143(3) r.w.s 144C of the Income-tax Act in pursuant to the directions of DRP dated 30/8/2010 for the asst. year 2006-07. 2. The assessee has filed following concise grounds:- The AO in p .....

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..... d in law and on facts by not including foreign exchange fluctuations/loss and provisions written' back as part of the operating income; SPECIFIC (COMPARABLE SPECIFIC) 9. The AO in pursuance of the directions of the DRP erred in law and on facts by upholding the inclusion of the following comparables for the stated reasons therein as part of the final list of comparables for the purposes of comparability analysis to determine the ALP of the International Transaction and to determine the Arithmetic mean of mark up on cost of comparable companies vis-a-vis that of the Tested Party's Margin - i. Asit C Mehta Financial Services Ltd. even though the same should have been excluded as comparable on the ground of being functionally dissimilar with different business models and with extra ordinary events like amalgamation. (Additional Ground filed separately as this comparable was part of assessee 's own set of comparables); ii. Maple e Solution Ltd. even though the same should have been excluded as comparable on the ground of its data being unreliable. (Additional Ground filed separately as this comparable was not contested before lower authorities for exclusion out of f .....

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..... is a beneficial section. It is intended to provide incentives to promote exports. The incentive is to exempt profits relatable to exports. In the case of combined business of an assessee, having export business and domestic business, the Legislature intended to have a formula to ascertain the profits from export business by apportioning the total profits of the business on the basis of turnovers. Apportionment on the basis of turnover was accepted as a method of arriving at export profits. In the case of section 80HHC, the export profit is to be derived from the total business income of the assessee, whereas in section IOA, the export profit is to be derived from the total business of the undertaking. Even in the case of business of an undertaking, it may include export business and domestic business, in other words, export turnover and domestic turnover. The export turnover would be a component or part of a denominator, the other component being the domestic turnover. In other words to the extent of export turnover, there would be a commonality between the numerator and the denominator of the formula. In view of the commonality, the understanding should also be the same. In other .....

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..... , we do not see any merit in these appeals. The substantial question of law framed is answered in favour of the assessee and against the Revenue." 3. The case of the Revenue is that the same should be excluded from the export turnover but should not be excluded from total turnover. On this issue, the judgment of Hon'ble Karnataka High Court rendered in the case of Tata Elxsi Ltd. (supra) supports the case of the assessee because in this case, it was held by Hon'ble Karnataka High Court that the total turnover is sum total of export turnover and domestic turnover and, therefore, if an amount is excluded from export turnover, the total turnover is also reduced by the same amount as a consequences of deduction from export turnover. In this view of the matter, we direct the AO to exclude the above expenses from total turnover as well while computing the deduction u/s 10A of IT Act. 4. Respectfully following the judgment of Hon'ble Jurisdictional High Court, we allow this ground of the assessee. 5. Ground No.2 is general in nature and does not require any specific adjudication. 6. Ground Nos.3 and 4 are regarding rejecting certain filters adopted by the assessee as .....

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..... ith average OP/TC as PLI of 14.56%. Thus, the assessee claimed its international transactions having operating margin at 12.31% at arms length price in comparison to arithmetic mean margin. Mean margin of the comparable at 14.56% is computed as under:- SN Comparable Company Without Adjs. % Markup on Total Cost 1 Ace Software Exports Ltd., 8.69% 2 Allsec Technologies Ltd., 11.16% 3 CS Software Enterprise Ltd 11.48% 4 Fortune Infotech Ltd. 20.36% 5 Genesys International Corpn, Ltd., 6.30%. 6 Kirloskar Computer Service Ltd., -12.19% 7 Mercury Outsourcing Management Ltd. -21.95% 8 Nucleus Netsoft and GIS (India) Ltd., 30.20% 9 Pentasoft Technologies Ltd., 11.28% 10 Spanco Telesystems and Solutions Ltd. 18.16% 11 Transworks Information Services -1.33% 12 Tricom India Ltd. 48.80% 13 Vishal Information Technologies Ltd. 46.69% 14 Wipro BPO Solutions Ltd 26.19% 15. The TPO rejected the TP analysis of the assessee and carried out a fresh search. The TPO selected 13 comparable companies as under:- SN Company Name Sales (Rs.cr.) OP to Total Cost % Provisions written back Adjusted OP/TC 1 Maple eSolutions Ltd. 7.43 32.66 0.17 35.70% 2 .....

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..... ial on record for admission of the additional ground raised by the assessee. 19. Thus the assessee is seeking exclusion of certain companies which have been selected by the assessee in the TP Analysis Study. 20. We have heard the learned Authorized Representative as well as learned Departmental Representative and considered the relevant material on record on the admissibility of the additional grounds. The learned Authorized Representative has submitted that the functional comparability of the companies namely Vishal Information Technology and Nucleus Net Soft and GIS India have been examined by this Tribunal in a number of cases and it was found that these companies cannot be considered as functionally comparable with the ITES provider. He has relied upon various decisions including the decision of this Tribunal wherein the comparability of these company has been examined. The learned Authorized Representative has also relied upon the decision of the Special Bench of ITAT, Chandigarh in the case of Dy. CIT v. Quark Systems Ltd. [2010] 38 SOT 307 and submitted that even if the assessee has taken a particular company as comparable in the TP study, the assessee is entitled to point .....

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..... cluding TPO were required to apply statutory provisions and consider for purposes of comparison functions, assets and risks (turnover), profit and technology employed by the tested party and other enterprises taken as comparable. Statutory duty is cast on them to under take above exercise. This has not been done in this case. We would only say that prima facie, as per the material, to which reference has been drawn by Shri Aggarwal, Datamatics does not appear to be comparable. Even if the taxpayer or its counsel had taken Datamatics as comparable in its T.P. audit, the taxpayer is entitled to point out to the Tribunal that above enterprise has wrongly been taken as comparable. In fact there are vast differences between tested party and the Datamatics. The case of Datamatics is like that of "Imercius Technologies" representing extreme positions. If Imercius Technologies has suffered heavy losses and, therefore, it is not treated as comparable by the tax authorities, they also have to consider that the Datamatics has earned extraordinary profit and has a huge turnover, besides differences in assets and other characteristics referred to by Shri Aggarwal. The Tribunal is a fa .....

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..... essee 's objection to inclusion of this comparable is on the basis of Related Party Transactions filter. It was submitted that RPT exceeds 25% of the sales and therefore, to be excluded. The assessee relied on the decision of the coordinate Bench of the Tribunal (Mumbai Bench) in the case of Stream International Services (supra), wherein, wherein with reference to this comparable company, it was held as under : 11. The first is M/s. Datamatics Financial Services Limited. It can be observed that the TPO applied filter of "Companies with less than 25% related party transactions ". The learned Counsel for the assessee took us through the Annual accounts of Datamatics Financial Services Limited, and submitted that the gross income of this company for the year ending on 31.03.2006 was at ₹ 2.31 crore as against total expenses of ₹ 1.84 crore. Referring to pages 319 and 320 of the paper book, our attention was drawn towards Annexure-2 to demonstrate that the "Transactions with the Associated Parties within the meaning of sections 92A and 92B of the Income-tax Act, 1961" showed one major transaction with Datamatics Limited towards 'Reimbursement of .....

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..... sactions', these will also cease to be international transactions, going out of the purview of section 92 itself. Obviously, such a view point is contrary to the clear intention and the language of the relevant provisions. A pure reimbursement of expenses by one AE to another AE is very much a 'transaction' as per section 92F(v) and consequently is equally an international transaction as per section 92B requiring consideration as per section 92 of the Act. Be that as it may, the learned Departmental Representative could not demonstrate the fact that such reimbursement of expenses was without any markup. As the so called comparable case of Datamatics Financial Services Limited was included by the TPO in the final list of comparables, in our considered opinion, the same is liable to be excluded as it involves related party transactions at much higher level, as against the filter adopted by the TPO himself, being companies with less than 25% related party transactions. We order accordingly." In view of the above, since this company fails in this filter adopted by the TPO, we direct the TPO to exclude this company from the list of comparables adopted." 28. As it .....

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..... this group company was in the year 1980-1990 and there were no allegations of mal practices or fraud in connection with business of this company and, therefore, rejected the contention of the assessee-company that this company should be rejected as comparable. This decision was rendered considering the decisions cited supra. We accordingly hold that this company cannot be rejected as a comparable following the decision of the Mumbai Bench of Tribunal in the case cited supra. Accordingly, we allow this ground of appeal of the revenue." 32. Thus, it is apparent that the comparability of this company was examined in assessee's own case and it was found that this company cannot be rejected as comparable on the alleged objections of involvement of directors of this company in alleged fraud. By following the order of this tribunal in assessee's own case, we decide this issue against the assessee and in favour of the Revenue. I. Vishal Information Technologies Ltd., 33. The learned AR of the assessee submitted that this company fails the employee filter as the cost of the employee is less than 2% of the total cost, therefore, this company is out sourcing its business acti .....

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..... P segment data has been considered by the TPO. IV. Apex Knowledge Salutations : 39. Learned AR of the assessee has submitted that this company is functionally different from the assessee as this company's main activity is electronic publishing and export of software. He has further contented that the TPO has used the information obtained u/s. 133(6) of the Income-tax Act. In support of his contention, he has relied upon the decision of the co-ordinate bench of this tribunal in the case of Goldman Sachs Services (P.) Ltd. (supra). 40. On the other hand, the learned DR has submitted that when the TPO has used the information obtained u/s. 133(6) and found that this company is functionally comparable with the assessee then in the absence of any vertical considered in the same segment either by the assessee or TPO these objections raised by the assessee cannot be accepted. 41. We have considered the rival submissions as well as relevant material on record. At the outset we note that the comparability of these 4 companies has been examined by the co-ordinate bench of this tribunal in case of Goldman Sachs Services (P.) Ltd. (supra) in para 13.4.1 to 14.3.2 as under:- '13.4. .....

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..... dvantage Off-shore Services (ITA No. l252/Bang/2010) has directed to use employee turnover filter in a consistent manner for selection of comparables and in the case of Asstt. CIT v. Maersk Global Services Centre (India) (P.) Ltd. [2012] 14 ITR (Trib.) 541 (Mum.) the Mumbai Bench of the Tribunal has analysed and rejected this company as comparable for the reason that it has outsourced a considerable portion of its business and is functionally different. Moreover, it was also submitted that the DRP in the later year of 2008-09 vide its order dated 3.8.2012 has rejected this company as a comparable (name changed to Coral Hub Ltd.), vide para 18 of the order, wherein ultimately, it was decided that there is major difference in functionality and the business model and the DRP Bench was of the view that Coral Hub (formerly known as Vishal Information Technology Ltd.) was not a suitable comparable and needs to be dropped from the final set of comparables. Based on the above submissions, it was submitted that this company cannot be used as a comparable and has to be excluded. 9.1 The learned Departmental Representative, however relied on the orders of the TPO. 9.2 After considering the .....

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..... e and Insulator at ₹ 12.23 crore. The break up of such revenue of Goldstone Teleservices Limited has been provided at page 236 of the paper book. Schedule forming part of the annual accounts of Goldstone Teleservices Limited divulges earnings in foreign currency at ₹ 4.24 lakh. Such detail is available at page 239 of the paper book. When we compare earning in foreign currency at ₹ 4.24 lakh with the earnings of BPO at ₹ 5.02 crore or for that purpose of the entity as a whole at ₹ 30.89 crore, it becomes manifest that this case does not pass through the filter adopted by the TPO, being, the 'companies whose export revenues are more than 25% of the revenues'. Therefore, we are of the opinion, that this company cannot be considered as a comparable for the purpose of determining the ALP in this case. We direct the same to be excluded. Datamatic Financial Services Ltd. 11. The assessee's objection to inclusion of this comparable is on the basis of Related Party Transactions filter. It was submitted that RPT exceeds 25% of the sales and therefore, to be excluded. The assessee relied on the decision of the coordinate Bench of the Tribunal (Mumb .....

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..... forceable by legal proceeding. There is no reference to any transaction having necessarily including profit element or mark-up so as to fall within the definition of 'transaction' under Chapter X of the Income-tax Act. Since the TPO applied filter of having companies with less than 25% related party transactions, it is not open to argue that the transactions of reimbursement of expenses duly reported by Datamatics Financial Services Limited as an 'international transaction' within the meaning of section 92B should be ignored simply because they represent reimbursement of expenses. If the contention of the Id. DR that the reimbursement of expenses not involving profit element should not be construed as a transaction, is taken to a logical conclusion, it would mean that all such dealings will cease to be transactions for the purposes of Chapter-X of the Act. Once these dealings are not considered as 'transactions', these will also cease to be international transactions, going out of the purview of section 92 itself. Obviously, such a view point is contrary to the clear intention and the language of the relevant provisions. A pure reimbursement of expenses by o .....

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..... ase from the final list of comparables." Since the DRP in assessee's own case for assessment year 2007-08 also considered and excluded this company, we uphold the assessee's objection in this regard and direct the Assessing Officer to exclude this company from the comparables adopted. Nucleus Netsoft & GIS(lndia) Ltd. 13. The last objection was with reference to the above company, which is on similar facts as that of Vishal Information Technologies, discussed above. It was submitted that this company is functionally different and fails under the employee cost filter. It was further submitted that there is a scheme of amalgamation of earlier company by the orders of the Hon'ble High Court of Judicature of Bombay, on 22.2.2006 and in view of amalgamation, the financials have changed and the business model also changed. Referring to the annual report placed on record, it was submitted that as against ₹ 24.02 lakhs of employee costs for the year ending 31st March, 2005, the employee cost has increased to ₹ 132.59 lakhs. Further, the data processing charges is also to the extent of ₹ 1.04 crores, which indicates that the assessee is outsourcing the .....

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..... see in the case on hand. 14.3.1 We have heard both parties and perused and carefully considered the material on record; including the judicial-decision cited and relied upon by the assessee. We find that the co-ordinate bench of this Tribunal in the case of Ariba Technologies India Pvt. Ltd. (supra) has considered the comparability of this company, namely, Apex Knowledge Solution Pvt. Ltd. in the ITES Segment and held that it is not functionally comparable to ITES provider as it provides services such as e-publishing knowledge based services, etc. At paras 26 & 27 of its order, the co-ordinate bench has held as under:- "26. The learned counsel further submitted that the comparable company chosen by the TPO viz., Apex Knowledge Solution Pvt. Ltd., should be excluded from the list of comparable companies chosen by the TPO. In this regard our attention was drawn to the decision of the ITAT Bangalore Bench in the case of Google India Pvt. Ltd. v. DCIT ITA No. l368/Bang/2010 (AY 06-07) order dated 19.10.2012. 27. We have considered the submission of the learned counsel for the Assessee. We find that in the case of Google India Pvt. Ltd. (supra), this tribunal in the case of TP .....

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..... ment which contradicts the claim of the assessee that this company fails the export revenue filter. Since the TPO has applied this information without inviting objections to the assessee, therefore, in the facts and circumstances of the case and in the interest of natural justice, we set aside this issue to the record of the AO/TPO to reconsider the same after affording opportunity to the assessee for raising the objections against this company. So far as Apex Knowledge Solutions is concerned it is apparent from the finding of the tribunal that the activity of electronic publishing knowledge based services etc. cannot be considered as comparable with the ITP services/BPO services provider company. Accordingly, following the earlier order of this tribunal, we direct the AO/TPO to exclude this company from the list of comparables. 44. Accordingly in view of the above discussion as well as decision of the coordinate bench of this tribunal in case of Goldman Sachs Services (P.) Ltd. (supra), we direct the AO to exclude these 4 companies from the list of comparables. 45. The next grievance of the assessee is that the TPO has not considered foreign exchange gain as part of the operati .....

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