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TMI Blog2018 (5) TMI 1739X X X X Extracts X X X X X X X X Extracts X X X X ..... and every ground raised by the assessee after giving due opportunity of being heard and pass a reasoned speaking order which has not been done in this case. 3. Per contra, the ld. DR submitted that opportunity was granted to the assessee before the TPO and detailed speaking order was passed pursuant thereto and decision rendered by the TPO were approved by the DRP and there is no requirement for passing speaking order. 4. We have heard the rival submissions and have carefully perused the relevant material on record. As is clear from the above stated order it is the duty of the DRP to decide the issues raised by the assessee before it dealing with all the contentions of the assessee. In that view of the matter, we deem it appropriate to remand the whole of the matter for A.Y 2006-07 to the file of the DRP with the direction to pass a reasoned and speaking order dealing with all the contentions of the assessee raised in the ground of appeal. Needless to say that while doing so, the DRP shall afford reasonable opportunity of being heard to the assessee. In view thereof, the grounds of appeal raised by the assessee are allowed for statistical purposes. ITA No. 1843/DEL/2014 [Assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransactions: * Use of single year (FY 2006-07) financial data and conducting a fresh search for comparables based on the data available at the time of assessment proceedings; * Use of power under section 133(6) of the Act to obtain information that was not available in the public domain; and * Denying the necessity of appropriate adjustment towards the risk differential on the ground that the assessee bears the single customer risk; hence, the assessee is not a risk free entity. Economic analysis of the Ld. TPO: 8. The TPO has arbitrarily rejected the filters adopted by the assessee in the TP documentation and imposed additional erroneous filters. 1. Rejection/ modification of the following quantitative filters applied by the Appellant * Selection of companies with service income greater than 50%; * Rejection of companies with research and development expenses to sales more than 3%; * Rejection of companies with net worth less than zero; * Rejection of companies with ratio of net fixed assets to sales greater than 200%; and 2. Adoption of following additional filters for screening of comparable companies * Rejection of companies whose data is not available for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... solutions to the customers and relied upon the Market Tools Research Private Limited. * Exclude Maple Esolutions Ltd. from the list of comparable companies on account of non reliable financial statements as the company's management was involved in a fraud. * Exclude Mold-Tek Technologies Ltd from the list of comparable companies as the company is engaged in providing high end structural engineering KPO services, which cannot be compared to the functional profile of the Assessee. Reliance was also placed on the case of Symphony Marketing Solutions India Pvt. Ltd. * Rectify the arithmetical errors in the calculation of margin of R Systems International Limited. * Exclude Triton Corporation Ltd from the list of comparable companies on account of nonreliable financial statements as the company's management was involved in a fraud. Reliance was also placed on the case of Market Tools Research Pvt. Ltd. * Exclude Vishal Information Technologies Limited (Coral Hub Limited) from the list of comparable companies on account of different functional profile, compared to the Appellant. Moreover, the company has low wages to sales Ratio. 13. In the order passed by the Hon'ble CIT(A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Software Systems Ltd (Seg) Appellant has rejected the comparable company on the following grounds: * Fails R&D filter * Diversified Segments * Information u/s 133(6) 5 HCL Comnet Systems & Services Limited (Seg) Appellant has rejected the comparable company on the following grounds: * Fails RPT filter * No data/annual report available * Abnormally high margins 6 Informed Technologies Limited Appellant has rejected the comparable company on the following grounds: * Super Normal Growth * Fails RPT filter * Abnormally high margin 7 Infosys BPO Ltd Appellant has rejected the comparable company on the following grounds: * Turnover is INR 649.56 cr as against Appellant at INR 5-4 cr * Scale of operations * Abnormally high margin 9 Wipro Limited (Seg.) Appellant has rejected the comparable company on the following grounds: * Abnormally high margin * High scale of operations * Fails R&D filter * Information u/s 133(6) 10. Bodhtree Consulting Ltd. * Business restructuring * No segmented accounts available 17. Thus, the ld. AR submitted the said that the companies are not comparable to the assessee's ITES segment and thus, should no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... served that no specific reason was given by TPO/DRP to reject RPM as MAM; ITAT had also held that Appellant cannot be estopped from claiming a particular method as MAM, though in TP study TNMM was adopted as primary method and RPM as secondary method; HC holds "The Court sees no reason to interfere since the adoption of the RPM by the Appellant was indeed found to be the MAM by DRP itself, accordingly dismisses Revenue's appeal" 23. Further reliance was also placed on the judgement of the ITAT in the case of Kobelco Construction Equipment India Limited (TS-299-ITAT-2017(DEL)-TP wherein it was held: "13 The aforesaid decision clearly clinches the issue that under the RPM, the focus is more on same or similar nature of properties or services rather than similarity of products and functional attribute is a primary factor while undertaking the comparability analysis under RPM. Further, RPM is mostly applied in the case of a distributor where reseller purchases tangible property and obtains services from the AE and without making any value addition, resells the same to third parties. Under these circumstances and looking to the fact that functions performed by the Appellant is of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 24 (Mum) - The assessee is, in fact, engaged in distribution activities. In such an activity RPM can be considered to be most appropriate method because bench marking is done at a gross level. v. ITO vs.Loreal India Pvt. Ltd. (Mumbai ITAT) - ITA No. 5423/Mum/2009- Held - RPM is one of the standard method and OECD guidelines also states that in case of distribution and marketing activities when the goods are purchased from AE's which are sold to unrelated parties, RPM is the most appropriate method. In the case before us, there is no dispute to the fact that the assessee buys products from its AEs and sells to unrelated parties without any further processing. vi. Nokia India (P) Ltd. (Delhi ITAT) - [2015] 167 TTJ 243 (Del)- A close scrutiny of the above two sub-clauses along with the remaining sub clauses of rule 10B(1)(b) makes it clear beyond doubt that RPM is best suited for determining ALP of an international transaction in the nature of purchase of goods from an AE which are resold as such to unrelated parties. Further concluded that RPM is best suited for determining ALP of an international transaction in nature of purchase of goods from an AE which are resold as such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profitability of such comparable uncontrolled companies is directly related to the level of risk borne, which is not so in the case of a captive service provider similar to the assessee as it assumes minimal risks and being an entity with a fixed mark up on the cost earn steady return year on year. The typical risks borne by these companies include market risk, product risk, technology risk, risk of project cost overruns, financial risk and entrepreneurial risk apart from the economic and political risks. However, the assessee being a "captive service provider" have an assured return revenue model, with "lesser economic and business risks. It is a fundamental economic principle that firms which do not take risks can expect to earn a lower rate of return. Therefore, the ld. AR concluded that the assessee's profits would be relatively more consistent from year to year compared to the comparable companies and the comparable companies would be expected to realise higher average profits to compensate for their higher risks. Thus, an adjustment with regard to the risk premia earned by the uncontrolled comparable companies becomes imperative and hence, the captive service provider is exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee was HCL Comnet Services Ltd contesting that it is functionally dissimilar, follows different financial year, has different policy of revenue recognition and only segmental information received by the TPO u/s 133(6) of the Act was provided. 56. The ld DR submitted that it is also engaged in business of ITES Service provider therefore, it is functionally most comparable. 57. We have carefully considered the rival contentions. The companies accounting year-ends on June 2007, however, the 133(6) data was submitted by the comparable from 01.04.2006 to 31.03.2007. We have also perused the annual report of the American Express ( India ) Private Limited V DCIT ITA No 1868/del/2015 DCIT V American express ( India) Private Limited ITA No 1674/Del/2015 A Y 2007-08 company at page No. 57 to 128 of the paper book. The main income stream of the assessee is bandwidth and other services and IT enabled services. The company has also provided segmental information at page No. 101 with respect to its telecommunication services division and IT enabled services division. In its IT enabled services division it provided service of data service management, end user computer services manageme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd it was found that this company is engaged in the medical transcription services and satisfies all the filters applied by the TPO. The assessee objected that this company is engaged in sales of software. The ld DRP rejected the contention of the assessee also. 38. Before us the ld AR submitted that ld TPO himself has stated that annual report for FY 2006-07 is not available and further no segmental information is provided. It was further argued that this company was formed after amalgamation of Geosoft Technologies, Iridium Technologies Pvt. Ltd. 39. Ld Departmental Representative submitted that ld TPO has correctly applied the filter and also this company is functionally similar. He therefore submitted that above comparable has rightly been included in the comparability analysis. 40. We have carefully considered the rival contentions and noted that stand alone annual financial statement provided of this company American Express ( India ) Private Limited V DCIT ITA No 1868/del/2015 DCIT V American express ( India) Private Limited ITA No 1674/Del/2015 A Y 2007-08 for year ended March 2007 shows that revenue model of this company is medical transcription, coding and software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT 147 ITD 83 has also held that the comparable is KPO and excluded this company. Therefore, respectfully following the decision of the Hon'ble Delhi High Court we direct exclusion of this comparable. 44. The next comparables objected are Mapple Solutions Ltd and Triton Corp Ltd wherein AR has stated that this company promoters are engaged in Fraud and therefore should be excluded. The ld AR further submitted that though taxpayer consider this company as comparable holding it engaged in call centre services but later on it was found that this company is subject to fraud and hence, the financial information is not reliable. He referred to page No. 650 and 651 of the paper book. He further relied on the decision of the coordinate bench in case of CRM Services Indi. Pvt Ltd. ITA No. 4068/Del/2009. 45. The ld DR submitted that the above company is selected by the assessee as functionally comparable and now the above cited order of the tribunal cannot be used as a precedence. American Express ( India ) Private Limited V DCIT ITA No 1868/del/2015 DCIT V American express ( India) Private Limited ITA No 1674/Del/2015 A Y 2007-08 46. We have carefully considered the rival conten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company. According to the data available at Prowess Data Base, it is engaged in the business of call centre activities; it had set up 100% EOU and it holds registration under section 10B. In regard to the second mentioned company, it was submitted that it is engaged in two activities i.e., telecom sector and BPO sector. It is also a company of Rastogi group and, therefore, other objections are the same as in the case of first mentioned company. The TPO mentioned that the company is deriving revenue from ITES activities which are comparable to the American Express ( India ) Private Limited V DCIT ITA No 1868/del/2015 DCIT V American express ( India) Private Limited ITA No 1674/Del/2015 A Y 2007-08 business of the assessee. Thus, both the companies were included as comparables. 17.3 In regard to Nucleus Netsoft & GIS (India) Ltd., it was submitted that its business is functionally different and there are related party transactions to the extent of 21.60%. Its PLI works out to 32.47% against 44% computed by the TPO. In the order, it is mentioned that this company is rendering ITES. The software part is handling of CAD/CAM services, which does not amount to software development. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the ministry of corporate affairs and they are true and fair. On perusal of the profit and loss account also we did not find any impact of fraud on the financial statements including the significant accounting policy and notes on account. None has been pointed out by the ld counsel. In fact it has not been disagreed by the ld AR that this company is functionally not comparable. It is further required to be noted that both these comparables are selected by the tax payer in its TP study report considering them functionally comparable. This fact is evident from para No. 12 of the order of the ld Transfer Pricing Officer. Firstly in both the companies there is no fraud either against or by the company. Secondly there is no impact of any fraud committed before two decades on the financials of the company. Further revenue of both the companies are increasing this year from the last year, therefore I it cannot be also assumed for this year at least that there is some impact of tainted promoters on the financials. Therefore, we do not have any option but to reject the argument of the ld AR for exclusion of the above comparable. Hence, we direct to retain the above both comparables namely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n are not available about software sales and software services. In view of absence of segmental information we are of the opinion that a software developer cannot be functionally comparable with a pure captive service provider. In view of this, we direct exclusion of Bodhtree Consulting Ltd from the comparability analysis. 51. The next comparable objected to by the assessee is Informed Technologies India Ltd submitting that it is functionally not comparable as it analyzed data on financial fundamental, corporate governance, director of executive compensation and capital market. It is further stated that it charges business development fee of 20% of the total cost and therefore its revenue model is also dismissed. we further relied on the decision of the coordinate bench in case of Cummins Turbo Technologies Vs. DCIT 53 Taxmann.com 492 (Pune) wherein, para No. 29 the above comparable were excluded. 52. The ld DR vehemently submitted that the comparable is functionally comparable and therefore, it cannot be excluded. 53. We have carefully considered the rival contentions. We have also perused the annual financial statement of the company for year ended on 31.03.2007 at page No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mediately preceding year/s may also be taken into consideration to find out whether the high profit margin represents the normal business trend. The FAR analysis in such case may be reviewed to ensure that the potential comparable earning high profit satisfies the comparability conditions. If it is found on such investigation that the high margin profit making company does not satisfy the comparability analysis and or the high profit margin earned by it does not reflect the American Express ( India ) Private Limited V DCIT ITA No 1868/del/2015 DCIT V American express ( India) Private Limited ITA No 1674/Del/2015 A Y 2007-08 normal business condition, we are of the view that the high profit margin making entity should not be included in the list of comparable for the purpose of determining the arm's length price of an international transaction. Otherwise, the entity satisfying the comparability analysis with its high profit margin reflecting normal business condition should not be rejected solely on the basis of such abnormal high profit margin." In terms of the aforesaid discussion of the Special Bench, it is quite clear that the concerns earning abnormal high profit margins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... analysis and therefore it deserves to be excluded. We hold so. 9. The plea setup by the CIT(A), and which has been reiterated before us is that the point setup by the assessee would involve consideration of multiple year data of the comparable whereas the transfer pricing analysis is required to be done based on the singular financial year data i.e. financial year data of the comparables relevant to the year in which the international transactions have been entered into. In our considered opinion, the aforesaid plea of the Revenue is untenable having regard to the issue in question. No doubt, sub-rule (4) of rule 10B of the Income Tax Rules, 1962 (in short "the Rules") prescribe that the data to be used in analyzing the comparability of an uncontrolled transaction American Express ( India ) Private Limited V DCIT ITA No 1868/del/2015 DCIT V American express ( India) Private Limited ITA No 1674/Del/2015 A Y 2007-08 with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. So however, the aforesaid rule is not absolute inasmuch as proviso thereof permits use of the data relating to other years, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny at page No. 57 to 128 of the paper book. The main income stream of the assessee is bandwidth and other services and IT enabled services. The company has also provided segmental information at page No. 101 with respect to its telecommunication services division and IT enabled services division. In its IT enabled services division it provided service of data service management, end user computer services management, managed security services, networking services and tools and process consultant services. In view of this it is apparent that this company is functionally comparable with the assessee. Merely because the company uses one or two words while describing its functions cannot make it un-comparable. However, DRP vide its direction dated 17.12.2014 at page No. 9/29 while discussing the above comparable noted that annual report of the company is given to the assessee for financial year ending on 31.03.2009, instead of 2007, hence, the ld TPO was directed to provide annual report of March 2007. However, the ld TPO vide order dated 14.01.2015 giving effect to the order of the ld DRP has not provided this information and before us to the annual report of the above company was als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ited V DCIT ITA No 1868/del/2015 DCIT V American express ( India) Private Limited ITA No 1674/Del/2015 A Y 2007-08 61. The next comparable is Wipro Ltd which is contested by the assessee stating that during the year there is an acquisition of the real business therefore, it makes an exceptional year. It was also contended that it has huge intangibles and therefore, there is difference in asset profile of the comparable. 62. The ld DR relied upon the orders of the lower authorities. 63. We have carefully considered the rival contentions. On perusal of the annual account of the company at page No. 22 it mentions following information. "We have continued to pursue the strategy of businesses which complement our service offering, provide access to niche skill sets and expand our presence in select geographies. We have a dedicated team of professionals who identify businesses which meet our strategic requirements and are cultural fit to Wipro. The following businesses have joined the Wipro family during the year 1. US based Quantcch Global Services LLC and the India based Quantcch Global Services Ltd. for a cash consideration, which includes upfront payment of approximately US ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for making adjustment to the assessee's provision of ITES segment (supra above). 35. In addition to the above, the assessee contended that on one of the comparable companies i.e. M/s Reliance Communications Infrastructure Ltd. (Marketing & Commission segment) selected by the Ld. TPO in his TP order for determining the Arm's Length Price of the assessee's international transaction of provision of marketing support services. The ld. AR further submitted that the Annual Report of the abovementioned company states that it is ENGAGED INTO DIVERSIFIED SERVICES as it recognizes its service income from various sources such as Internet Service Provision ('ISP'). Internet Data Centre Services ('IDC'). Provision of Infrastructure, Commission and Marketing Income. Therefore, the ld. AR submitted that the said company is functionally not comparable to the assessee's MSS segment and thus, should not be included in the final set of comparable companies for determining the Arm's Length Price of the Appellant's international transaction of provision of marketing support services. It was further submitted that aforesaid comparable is involved in multifarious activities, and there is no segmental ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e method which is best suited to the facts and the circumstances of each particular international transaction, and which provides the most reliable measure of an arm's length price in relation to the international transaction. (2) In selecting the most appropriate method as specified in sub-rule (1), the following factors shall be taken into account, namely: i. the nature and class of the international transaction; ii. the class or classes of associated enterprises entering into the transaction and the functions performed, assets employed arid 7'isks assumed by such enterprises; iii. the availability, coverage and reliability of the data necessary for application of method; iv. the degree of comparability existing between the international transaction and the uncontrolled transaction and between the enterprises entering into such transactions; v. the extent to which reliable and accurate adjustments can be made to account for differences, if any, between the international transaction and the comparable uncontrolled transaction or between enterprises entering into such transactions; vi. the nature, extent and reliability of assumptions required to be made in applic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on record. The agreement entered into by the assessee with AE clearly provides cope of activities of the assessee which includes reprinting of books received by the assessee from AE in E format. In our considered opinion, reprinting of books needs deployment of assets, employment of employees and risk involved in publishing and selling and therefore, the parameters as required for resale method are not applicable as other value addition and application of technology and assets were made by the assessee for the purpose of reprinting, publishing etc. In view thereof, we do not find any infirmity in the order passed by the CIT(A) as well as the TPO on this count. Accordingly, we do not find any merit in this ground which is rejected. 43. We may like to point out that as we have allowed and directed to exclude various comparables in the ITS and Marketing segment, we deem it fit to direct the TPO to recomputed the ALP on all three segments after giving due adjustments to the working capital as determined by the ld. CIT(A) with respect to the comparables remaining after excluding comparables indicated hereinabove. 44. In the result, the appeal of the assessee is partly allowed. The o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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