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TMI Blog2016 (11) TMI 1566X X X X Extracts X X X X X X X X Extracts X X X X ..... Briefly the facts of the case are that the assessee is a company incorporated under the Companies Act, 1956. It is a wholly owned subsidiary of M/s. Acusis Holding Company Ltd., British Virgin Islands, which in turn is a wholly owned subsidiary of Acusis LLC, USA. It is engaged in the business of providing medical transcription services falling within the category of information technology enabled services ["ITES"] to its AEs i.e., Acusis LLC, USA. 3. The return of income for the assessment year 2004-05 was filed on 27.10.2004 declaring income of Nil under the normal provisions of Act. Against the said return of income, the case was selected for scrutiny by issuing notice under section 143(2) of the Act. The assessee company also reported the international transactions with its AE of "Provision of medical transcription services" at ₹ 10,93,59,573/-. 4. The assessee company sought to justify the consideration received for the above international transactions entered with its AE to be at arm's length price. The assessee company also submitted a transfer pricing study report adopting the operating profit to total cost as a profit level indicator for the transfer pricing study. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... data ii. Companies which are showing diminishing revenue are excluded. iii. Companies that have substantial underutilisation of assets were excluded. iv. Companies having persistent losses are excluded. v. Companies whose financial information not on the public domain are excluded. vi. Companies having export earnings less than 25% of total revenue are excluded. 7. The TPO has rejected all comparables selected by the assessee company in the TP study and introduced 9 new companies which are in page No. 25 of the TPO order. The final set of comparables selected by TPO are as under: S1. No. Name Operative Cost Operative Revenue Operative Profit Operative Profit/Cost 1 Nucleus Net Soft & Gis India Ltd. 1.00 1.84 0.38 16.87% 2 Vishal information Technologies Ltd 8.37 13.88 4.61 48.13% 3 Wipro BPO Ltd 322.3 430.31 108.01 33.51% 4 Tricom India Ltd 6.34 9.24 2.9 43.74% 5 Fortune Infotech Ltd 8.08 11.38 3.3 40.84% 6 Mercury Outsourcing Ltd 1.02 1.08 0.058 5.7% 7 Spanco Telesystems & Solutions Ltd 10.32 15.44 4.57 40.1% 8 Allsec Technologies Ltd 24.10(adj.) 24.84 0.83 3.44% 9 Ultramarine Pigments Ltd 6.18 10.09 3.91* 63.27% A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the benefit of proviso to sub section (2) to 92C of the Act should be granted to the assessee as a standard deduction. 11. As regards the entities M/s. Ultra Marine Pigments Limited and M/s. Vishal Info Tech Ltd., it was contended that these companies cannot be considered as comparables with that of assessee company as these companies were making super abnormal profits. The assessee company also contended that in respect of travelling expenditure and telephone expenditure incurred in foreign exchange, reducing the same from export turnover alone is not correct. 12. After considering the above submissions of the assessee company, the learned CIT(A) vide order dated 21.01.2011, upheld the filter applied by the learned TPO and application of use of only current year data as against multiple data as adopted by the assessee. And in respect of selection of comparables is concerned, the learned CIT(A) held that the entities making super abnormal profits are to be excluded. However, in respect of travelling and telecommunication expenditure incurred in foreign currency, the CIT(A) directed the TPO/AO to reduce from both the export turnover as well as the total turnover for the pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 92A(2) and relying on certain assumptions that are not tenable keeping in mind the provision of the law and intention of the legislation. 6. The learned Transfer Pricing Officer and the learned Assessing officer have erred, in law and in facts, by rejecting certain comparable companies identified by the Appellant as being functionally different using unreasonable comparability criterion and rejecting companies which are primarily engaged in providing IT Enabled Services. 7. The learned Transfer Pricing Officer and the learned Assessing officer have erred, in law and in facts, by rejecting certain comparable companies identified by the Appellant as being persistent operating loss makers. The Appellant had used this criterion and rejected companies that had operating losses for a continuous period of three or more financial years. However, the learned transfer pricing officer has rejected the comparables identified by the Appellant although these companies have operating profit in one of the financial years and are not persistent operating loss makers. 8. The learned Transfer Pricing Officer and the learned Assessing officer have erred, in law and in facts, by rejecting certain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration foreign exchange fluctuation gain/loss and other income in computing the operating margins of the Appellant and the comparable companies. 14. The learned Transfer Pricing Officer and the learned Assessing Officer have erred in law and in facts, in computing operating margins of one of the comparables by adopting incorrect financial data (i.e. normalising certain operating expenses by taking an average of such expenses incurred by the company over prior and subsequent two years) thereby resulting in an upward adjustment to the arm's length price. 15. The learned Transfer Pricing Officer and the learned Assessing Officer have erred, in law and in facts, by considering an arbitrary downward adjustment of (-2 per cent) for differences in the working capital and differences in the risk profile. While doing so the learned transfer pricing officer and the learned Assessing Officer have disregarded the working capital adjustment provided by the Appellant. 16. The learned Transfer Pricing Officer and the learned Assessing Officer have erred, in law and facts, by not considering that the adjustment to the arm's length price, if any, should be limited to the lower end ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of M/s. Tricom India Limited., it is clear that the revenue is derived only from the Information and Technology services of ₹ 9,24,39,411/-. Even in the schedule to the current assets of the balance sheet no closing stock is shown. Further, the company had expressly stated in schedule "S" that it is engaged wholly in ITeS and BPO business as under: "After the scheme of Arrangement and Reconstruction, the company is engaged in the providing the services in the information & Technology Enabled Services (ITES)/BPO : Transaction Processing to customers in overseas market." The decision of the coordinate bench in the case of 24/7 customers cited supra is based on the functional dissimilarity i.e., the company is engaged in the development of software products. But the evidence on the record as stated above is contrary. Therefore the decision of the coordinate bench in the case of 24/7 Customer is per incuriam, as said decision was rendered by the coordinate bench without referring to any material on record in support of the conclusion that company is engaged in software development. In the circumstances, we are unable to agree with the submission that the company was engaged i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision of Exxon Mobil Company India (P.) Ltd. Vs. Dy. CIT [2011] 12 taxmann.com 84/46 SOT 294 (URO) (Mum.-Trib), held to the same effect. We find from the record that the TPO/AO had not undertaken the exercise of going into the reasons for abnormal losses. Therefore we remit back to the file of TPO/AO to undertake this exercise, and if it is found that the losses are incurred not on account of any special reasons and is a normal business loss to include it in the list of comparables otherwise to exclude the same from list of the comparables. iv) M/s. Mercury Outsourcing Limited: The assessee company had argued for inclusion of this company in the list of comparables. There is no dispute about the functional comparability of this company. The CIT(A) had deleted this company from the list of comparables on the ground of low margins. Now it is trite law that the companies cannot be excluded for the reason of high/low profits as held by the special bench in the case of DCIT Vs. M/s. Quark Systems Pvt Ltd., [2010] 38 SOT 307 (Chd.) (SB). Therefore, the reasoning of the CIT(A) to exclude this company from the list of comparables is not in consonance with the settle position of la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The conditions prevailing in the export and domestic market in which the respective parties to the transactions operate are different and therefore the filter of 25% export earnings to total sales is held to be valid by the decisions of Customer.Com Pvt Ltd v DCIT [2012] 28 taxmann.com 258 (Bang.) : [2013] 140 ITD 344 (Bang.) : [2013] 21 ITR (Trib) 514 (Bang.), ITO V CRM Services India (P) Ltd., [2011] 48 SOT 41 (Del (URO), M/s. Stream International Services Pvt. Ltd v ADIT [2013] 31 taxmann.com 227 (Mum.). It is not the case of assessee company that it passes through the export filter of 25% to total revenue. Therefore the ratio laid down in the cases cited supra is squarely applicable to the facts of the present case. We therefore uphold the action of TPO/AO in including this company in the list of comparables. 15. Thus the grounds of appeal 2 to 12 are disposed off. The other grounds of appeal are neither pressed nor argued during the course of hearing of appeal and therefore dismissed as such. 16. In the result, the appeal filed by the assessee is partly allowed. Departmental appeal No. 444/Bang/2011 17. The revenue being aggrieved by that part of the order of CIT(A) wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aking profits at wide variance with the arithmetic mean of the PLI of the comparables, without appreciating the detailed reasons recorded in the TPO's order for the selection of such companies as functionally comparable companies following an elaborate search process and application of appropriate filters. 9. The Learned CIT (Appeals) has erred in following the order of the ITAT Banalore Bench in the case of Sap Labs Ltd. for the assessment year 2003-04 in ITA No.398 and 418/Bang/2008 dated 30.08.2010 without examining the facts and circumstances of the assessee's case in detail and without appreciating that the assessee company is not a risk mitigated company and that in the above mentioned ITAT decision, no benchmarks have been laid down for categorizing a company as a super profit or low profit case. 10. The learned CIT (Appeals) has erred in relying on the above mentioned ITAT, Bangalore Bench decision in the case of Sap Labs India (P.) Ltd. (supra), without pointing out any peculiar economic conditions to which the so-called super profit or low profits of the concerned companies ore attributable. 11. The learned CIT (Appeals) has erred in arriving at the adjusted me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... search & Development India (P.) Ltd. v DCIT IT (TP)A No. 1222/Bang/2011 : TS-108-ITAT-2013-Bang-TP • In the case of Rusabh Diamonds v ACIT ITA No. 7217/Mum/2012 : TS-91-ITAT-2013-Mum-TP, the ITAT held that gain on hedging of foreign currency exposure on the underlining trade receivable or payable the profit of loss will be operating in nature. • Four Soft Limited v DCIT ITA No. 1495/HYD/2010 : TS-518-ITAT-2011(HYD)-TP • M/s. Capital IQ Information Systems (India) Pvt. Ltd v DCIT [2013] 32 taxmann.com 21 (Hyd.). • Brigade Global Services (P.) Ltd v ITO [2013] 33 taxmann.com 618 (Hyd-Trib.) First Advantage Offshore Services (P.) Ltd. v DCIT ITA No. 1086/B/11 21. Therefore we do not find any reason to interfere with the order of the CIT(A). 22. In the result, the grounds of appeal raised by the revenue in this regard are dismissed. 23. Ground Nos. 5 to 7 challenges the direction of CIT(A) to grant the benefit of the proviso to sub section (2) of section 92C of IT Act as a standard deduction. This issue is covered against the assessee by the decision of Bombay Bench in the case of Bayer crop Science Ltd. V. Addl. CIT [2012] 25 taxmann.com 575 (Mum. - Trib) w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en place does not exceed 5%. In other words the benefit under the proviso cannot be given as a standard deduction. In the results, the grounds of appeal raised by the revenue on this issue are allowed. 25. Ground Nos. 8 to 10 challenges the direction of CIT(A) to exclude the companies making super profits and the low margin loss making companies as comparables. As held by us in the assessee's appeal supra, no company can be excluded from the list of comparables mainly on the ground that the companies making abnormal profits without going into the reasons for such abnormal profits. Therefore the reasoning of CIT(A) is not acceptable and does not hold water. However, the AR had pleaded for exclusion of Ultramarine Pigments Ltd., and Vishal Information Technologies Limited for different reasons. We shall deal with each of them: (i) M/s. Ultramarine Pigments Limited: It is contended before us that this company cannot be compared with that of the assessee company as it is functionally different and it is engaged in the business of publishing, healthcare and litigation support. Thus it was submitted that it is functionally dissimilar with that of assessee company. This company was cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed under section 143(3) after issuing notice under section 143(2) after referring the matter to TPO for determining of arm's length price in respect of the international transaction of provision of providing medical transcription services of ₹ 15,32,19,356/- to its AE i.e., Acusis LLC, USA on the basis of cost plus 10% margin. 30. The assessee company sought to justify the consideration received for the above international transactions entered with its AE to be at arm's length price. The assessee company also submitted a TP study report adopting the operating cost to the total cost as a profit level indicator for the TP study. The assessee company applied the Transactional Net Margin Method (TNMM) which was considered to be the most appropriate method for the purpose of bench marking the international transactions. The assessee company's profit margin was computed at 11.6%. The assessee company claimed that the same was comparable with the other companies rendering IT enabled services. For the purpose of TP study, the assessee company had chosen 12 comparables and weighted Arithmetic Margin of these comparables was computed at 8.48%. Thus it was claimed that the transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 143 vide order dated 26.12.2008 incorporating the above TP adjustment and reducing the telecommunication charges and internet charges of ₹ 19,93,519/- reducing from export turnover for the purpose of computing the deduction under section 10A of the income tax act. 35. Being aggrieved by the assessment order, appeal was filed before CIT(A)-IV, Bangalore, who vide consolidated order dated 21.1.2011 for the assessment year 2004-05 and 2005-06 had held that the high profit companies and the low margin companies cannot be considered as comparables following the law laid by the jurisdictional high court in Sap Labs Pvt. Ltd. Thus the following 3 companies were held to be uncomparable with that of assessee company: 1. Vishal Info Tech Ltd 2. Nucleus Net Soft and GIS Ltd 3. Transworks Information Service Ltd 36. The CIT(A) also held that in respect of telecommunication and internet charges incurred to the extent of ₹ 19,93,519/-, the same should be reduced from the total turnover as well as from export turnover and in respect of tolerance, the benefit of proviso to sub section (2) of 92CA, the CIT(A) held that the same should be allowed as a standard deduction. 37 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mendment brought about by the Finance (No. 2) Act 2009 with effect from 01.10.2009 without taking into consideration the ITAT decision in the case of Global Ventege (P.) Ltd. (supra). 9. The learned CIT (Appeals) has erred in relying on the CBDT Circular No. 5/2010 dated 03.06.2010 where it has been clarified that the second proviso to section 92C(2) was applicable for the assessment year 2009-10 onwards, which was subsequently modified by CBDT by way of a corrigendum dt. 30.9.2010. 10. The learned CIT (Appeals) has erred in directing the Assessing Officer to exclude 3 (three) comparable companies as being super profit making, cases and companies making profits at wide variance with the arithmetic mean of the PLI of the comparables, without appreciating the detailed reasons recorded in the TPO's order for the selection of such companies as functionally comparable companies following an elaborate search process and application of appropriate filters. 11. The learned CIT (Appeals) has erred in following the order of the ITAT, Bangalore Bench in the case of Sap Labs India (P.) Ltd. (supra) for the assessment year 2003-04 in ITA No. 398 and 418/Bang/2008 dated 30.08.2010 without ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reign exchange fluctuations arising out of exports made as a part of operating profit. This issue is already decided by us in favour of the assessee company in the assessment year 2004-05 in ITA No. 442/Bang/2011. Following the same, we dismiss this ground of appeal. 41. Ground Nos. 7, 8 and 9 challenges the direction of the learned CIT(A) to allow the benefit under proviso to sub section (2) of 92CA as standard deduction. This issue is already decided by us in the assessee's own case for the assessment year 2004-05 in favour of the revenue following the same reasoning we dismiss the ground of appeal filed by the revenue. Hence dismissed. 42. Ground Nos. 10, 11 and 12 challenges the orders of the CIT(A). The directions of the CIT(A) to delete the entities M/s. Vishal Info Tech Ltd, M/s. Nucleus Net Soft and GIS Ltd and M/s. Transworks Information Service Ltd for the reasons that the high profit making companies and low margin companies cannot be considered as comparables. This reasoning of CIT(A) was reversed by us in the assessee's own case in the assessment year 2004-05. However, the learned AR submitted that these companies needs to be excluded for the reasons of functionality ..... X X X X Extracts X X X X X X X X Extracts X X X X
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