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TMI Blog2018 (9) TMI 1020X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee : Shri Arvind Sonde Harsh Kothari, A.Rs For The Revenue : Shri V. Jenardhanan Saurabh Deshpande, D.Rs ORDER PER RAVISH SOOD, JUDICIAL MEMBER: The present appeal filed by the assessee is directed against the order passed by the A.O under Sec. 143(3) r.w.s. 144C(5) of the Income Tax Act 1961(for short Act ), dated 28.10.2010 for AY 2006-07. The assessee assailing the assessment order passed by the A.O has raised before us the following grounds of appeal: Each of the following grounds are independent of, and without prejudice to one another: ( 1) On the facts and in the circumstances of the case and in law, the learned Transfer Pricing Officer (TPO) and the learned Assessing Officer (AO) under directions issued by the Hon ble Dispute Resolution Panel ( DRP ), erred in making an addition of ₹ 4,75,65,420/- to the Appellant's total income based on the provisions of Chapter X of the Income-tax Act, ( the Act ). ( 2) On the facts and in the circumstances of the case and in law, the learned TPO erred and the Hon ble DRP further erred in upholding / confirming the action of the TPO of disregarding the benchmarking anal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omputing the adjustment to the total income of the Appellant. ( 8) On the facts and in the circumstances of the case and in law, the learned TPO erred and the Hon ble DRP further erred in upholding / confirming the action of the TPO in not accepting the Global pricing policy followed by the Appellant in respect of back office support services transaction. ( 9) On the facts and in the circumstances of the case and in law, the learned TPO erred and the Hon ble DRP further erred in confirming the action of the TPO in not stating any reasons to show that either of the conditions mentioned in clauses (a) to (d) of Section 92C(3) of the Act were satisfied before making an adjustment to the income of the Appellant. ( 10) On the facts and in the circumstances of the case and in law, the learned TPO erred and the Hon ble DRP further erred in upholding/conf irming the action of the TPO in not demonstrating that the motive of the Appellant was to shif t prof its outside of India by manipulating the prices charged in its international transactions which is a pre - requisite condition to make any adjustment under the provision of Chapter X of the Act. The Appellant p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... review the arm s length nature of its international transactions. The TPO observed that the assessee had adopted Transactional Net Margin Method (for short TNMM ) as the Most Appropriate Method (MAM). It was noticed by the TPO that the assessee adopting the Net Cost Plus [operating profit/operating cost] (fort NCP ) as its Profit Level Indicator (PLI), had therein benchmarked the back office support services provided to its AEs. It was noticed by the TPO that the assessee had in its Transfer Pricing Study Report (for short TPSR ) worked out its NCP mark up at 12.68%. It was further observed by the TPO that the assessee had in his TPSR adopted 11 comparables the arithmetic mean NCP mark up on multiple year basis of which was shown at 10.38%. Still further, the single year NCP mark up of the said comparables worked out at 12.23%. However, the TPO rejected 8 out of 11 comparables and after selecting 10 additional comparables made a final set of 13 comparables for benchmarking the international transactions of the assessee, as under: Sr. No. Company Name Sales (Rs. cr.) OP to Total Cost% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under Sec. 144C of the Act. The DRP after deliberating on the objections accepted the claim of the assessee that as one of the comparable viz. M/s Vishal Information Technology Ltd. was functionally different, hence the same had wrongly been selected by the TPO as a comparable for benchmarking the international transactions of the assessee. However, the selection/rejection of the other comparables by the TPO was upheld by the DRP. Further, the objection of the assessee as regards using of a single year data by the TPO as against the multiple year data used by the assessee did not find favour with the DRP. The DRP was also not impressed with the claim of the assessee that the risk adjustment, working capital adjustment and market cost adjustments had also wrongly not been allowed by the TPO. However, the DRP finding favour with the claim of the assessee for allowing the benefit of plus/minus 5% variations while determining of its ALP observed, that in case the ALP so determined falls within the plus/minus 5% variation then no adjustment would be called for in the hands of the assessee. 7. The A.O vide his order passed under Sec. 143(3) r.w.s. 144C(5) of the Act, dated 28.10.2010, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d company, the ld. A.R drew our attention to the fact that under the note Revenue recognition it was specifically stated that income from sale of software and allied services was recognized on fulfilment of contractual applications with customers and/or as per the terms of agreement with the customers. The ld. A.R further submitted that against the generic name of three principal products/services of the company in the balance sheet abstract and companies general business profile (Page 435 of APB ) the same was stated to be Software solution IT Enabled Services . It was further averred by the ld. A.R that the aforementioned comparables viz. Apex Knowledge Solution Pvt. Ltd. did not form part of the TPO s search for ITeS Companies in Prowess and Capitalline Plus data base, but rather was identified when the search for the companies was expanded by him to software development services companies. The ld. A.R taking support of the aforesaid facts submitted that the very search process in itself evidenced that the aforesaid company was primarily a software development company. It was further the contention of the ld. A.R that now when the TPO had rejected the comparables selecte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the backdrop of our aforesaid observations the AO/TPO is directed to exclude M/s Apex Knowledge Solution Pvt. Ltd. from the final list of comparables. ( II). ASIT C. MEHTA FINANCIAL SERVICES LTD: ( formerly known as: Nucleus Net Soft Gis (I) Ltd) 11. The ld. A.R submitted that though the aforementioned comparable selected by the TPO is engaged in software development activities as well as ITeS, but no segmental bifurcation for ITeS was available. In order to fortify his aforesaid contention the ld. AR took us through Schedule 9 forming part of the balance sheet of the aforementioned comparable (Page 606 of APB ). The ld. A.R taking us through the income generated from operations by the aforementioned compaany drew our attention to the fact that against IT enabled services and Software development a consolidate amount of ₹ 55,106,523/- was mentioned. It was thus, the contention of the ld. AR that no segmental break up as regards the IT enabled services of the aforementioned company viz. M/s Nucleus Net GIS (I) Ltd. was available. The ld. A.R further took us through the revenue recognition policy of the aforesaid company at Page 608 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orised representatives of both the parties, perused the orders of the lower authorities and the material available on record in context of the aforementioned comparable. We find ourselves to be in agreement with the ld. A.R that no separate segmental data for ITeS is available in respect of the aforementioned comparable viz. M/s Asit C. Mehta Financial Services Ltd. for the year under consideration. We are of the considered view that as the aforesaid company selected by the TPO is engaged in software development activities as well as ITeS, thus in the absence of separate segmental data for ITeS sector no feasible functional comparison as against that of the assessee company would be possible. We thus, in the backdrop of our aforesaid observations are of the considered view that the aforementioned company viz. M/s Asit C. Mehta Financial Services Ltd. cannot be held as a comparable for benchmarking the international transactions of the assessee with its AEs during the year under consideration. The AO/TPO are directed to exclude the aforementioned company viz. M/s Asit C. Mehta Financial Services Ltd. from the final list of comparables. ( III). COSMIC GLOBAL LTD: 13. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not liable to be excluded from the final list of comparables. 14. We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record in context of selection of the aforesaid company as a comparable by the TPO. We find that it remains as a matter of fact that during the year under consideration significant translation charges of ₹ 1,40,72,761/- forming 52.45% of the total cost was incurred by the aforementioned company in respect of the outsourced translation work. We are further in agreement with the ld. A.R that the fact that a payment of ₹ 80,32,952/- towards translation charges paid by the assessee in foreign currency, substantiates that the translation activities had been outsourced by the said company during the year. We find that the Tribunal while disposing off the assesses own appeal for A.Y 2005-06 had excluded M/s Cosmic Global Ltd. from the final list of the comparables, for the reason that it had outsourced part of the business activities to others, whereas the assessee had carried out the entire activities itself. We are of the considered view that as the factual situation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he total revenue of the BPO segment amounting to ₹ 5,02,71,000/- would hardly work out to 0.84%. In the backdrop of his aforesaid contentions it was submitted by the ld. A.R that the said company was liable to be excluded from the list of comparables considering the export filter applied by the TPO. Per contra, the ld. D.R relied on the orders of the AO/TPO. It was submitted by him that the aforementioned company viz. M/s Goldstone Infratech Ltd. having been found to be functionally comparable was thus rightly selected by the TPO as a comparable for benchmarking the international transactions of the assessee with its AEs. 16. We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record in context of the aforementioned company viz. M/s Goldstone Infratech Ltd. selected as a comparable by the TPO. We find from a perusal of Schedule 14 of the Profit and loss account of the aforementioned company for the year ended 31st March, 2006, that as against the total turnover of ₹ 30,89,44,530/- the export turnover of the said company was only to the extent of ₹ 2,29,721/-. We find that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he said company for comparison of the profitability of the assessee. The ld. A.R in order to substantiate his aforesaid contention drew our attention to the extract of the news article published in The Guardian , dated 06.06.2008 (Page 1380-1383 of APB). On a perusal of the aforesaid extract of the news article it emerges that Ms. Sheetal Rastogi who is the director of the aforesaid company viz. Maple eSolutions Limited is alleged to have played a major role in the London fraud and was on the run. The ld. A.R further submitted that in the backdrop of the aforesaid facts, the Tribunal while disposing off the appeal in the assesses own case for A.Y 2005-06, taking cognizance of the fact that the members of the Rastogi Group owning the aforementioned company were under serious indictment, thus being of the view that it would be unsafe to take the results of the said company for benchmarking the international transactions of the assessee company, had excluded the said company from the list of the comparables. On the basis of the aforesaid submissions, it was the contention of the ld. A.R that the aforesaid company viz. M/s Maple eSolutions Limited be excluded from the final list of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said company would not inspire any confidence. We thus, finding ourselves to be in agreement with the view taken by the Tribunal in the assesses own case for A.Y 2005-06 that where financial results of a company are not reliable due to fraud committed by the directors, it should not be considered for comparability analysis, thus are of the considered view that it would not be proper to include the said company in the final list of comparables for benchmarking the international transactions of the assessee with its AEs. In the backdrop of our aforesaid observations, we direct the AO/TPO to exclude the aforementioned company viz. M/s Maple eSolutions Ltd. from the final list of comparables. ( VI). DATAMATICS FINANCIAL SERVICES LTD: 19. The ld. A.R adverting to the facts pertaining to the aforementioned company selected as a comparable by the TPO submitted, that the latter during the year under consideration viz. A.Y 2006-07 had significant Related Party Transactions (for short RPT ) of more than 25%. It was submitted by the ld. A.R that on the very ground of RPT of more than 25% the Tribunal in the case of Stream International Services Pvt. Ltd. Vs. ADIT (Internation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al transactions of the assessee with its AEs. We thus, in terms of our aforesaid observations direct the AO/TPO to exclude the comparable viz. M/s Datamatics Financial Services Limited from the final list of comparables. 21. We shall now advert to the comparables which were selected by the assessee in its Transfer pricing study report (for short TPSR ) for benchmarking its international transactions with its AEs, but were rejected by the TPO. We shall cull out the facts pertaining to the said respective comparables, contentions of the authorized representatives to buttress their respective claims and our observations as regards the same, as under:- ( I) CS SOFTWARE ENTERPRISES LTD: 22. The ld. A.R taking us through the facts pertaining to the aforementioned company which was selected by the assessee as a comparable submitted, that the same was rejected by the TPO by observing that it was also engaged in software development services and no separate segmental financial information was available for ITeS/BPO activity in the standalone financial statement. The ld. A.R rebutting the aforesaid observations of the TPO averred that the aforesaid company viz. M/s CS Softw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee for A.Y 2005-06 viz. DBOI Global Services Pvt. Ltd. Vs. ACIT (OSD), Circle-2(1), Mumbai (ITA No. 812/Mum/2012, dated 24.08.2016) had after deliberating on the annual report of the company observed that it appeared that the said company was into ITeS/BPO service. However, as the functional profile of the company alongwith assets employed and risks undertaken were required to be examined in detail for coming to a conclusion as to whether the said company was comparable to the assessee or not, the matter in all fairness was restored to the file of the AO/TPO for deciding the same afresh after affording opportunity of being heard to the assessee. We find that as the functional profile of the aforesaid company and that of the assessee had during the year under consideration not witnessed any change, thus in all fairness, finding no reason to take a divergent view we finding ourselves as being in agreement with the view taken by the Tribunal while disposing off the appeal of the assessee for A.Y 2005-06, thus in the same terms restore the matter to the file of the A.O/TPO for fresh adjudication. The A.O/TPO is directed to examine in detail the functional profile of the aforementi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsfer Agent Activities (R T); (ii) Records management activity (Records); and (iii) Payroll Price Fund Activity (Payroll). It was thus the contention of the ld. D.R that the aforesaid company was rightly excluded by the TPO from the final list of comparables. 25. We have heard the authorized representatives of both the parties, perused the orders of the lower authorities and the material available on record in context of rejection of the aforementioned company viz. M/s MCS Limited as a comparable by the TPO. We have deliberated at length and are of the considered view that the aforementioned company was rejected by the TPO as a comparable for the reason that it was found to be engaged in handling public issue and acting as Registrar and Transfer Agent. We though are persuaded to be in agreement with the contention of the assessee that under Transactional Net Margin Method ( TNMM ), the standard of comparability is relaxed relatively in comparison to the other methods and only broad similarity of functions is required. However, we are of the considered view that as not only the business model of the aforementioned company is different from that of the assessee, but unlike the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aforementioned company was functionally comparable, hence the same had wrongly been excluded by the TPO from the final list of comparables. Per contra, the ld. D.R relied on the orders of the A.O/TPO. It was submitted by the ld. D.R that the aforementioned company viz. Tata Share Registry Ltd. after necessary deliberations was rightly rejected by the TPO as a comparable. It was submitted by the ld. D.R that as admittedly the aforementioned company was into payroll, record management and registry and transfer agent activities which were obviously not the activities performed by the assessee, hence, it being functionally incomparable with the assessee was rightly rejected as a comparable by the TPO. Further, it was the contention of the ld. D.R that as the activities of the aforementioned company viz. Tata Share Registry Ltd. were related to the domestic segment only, whereas the assessee was providing the services to its overseas customers, hence, on the said count also no feasible comparability analysis of the financial results of the assessee as against those of the aforementioned company could have been carried out. 27. We have heard the authorized representatives for both the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable by the TPO. 29. We have heard the authorized representatives of both the parties, perused the orders of the lower authorities and the material available on record in context of rejection of the aforesaid company viz. M/s Ask Me Info Hubs Ltd. as a comparable by the TPO for benchmarking the international transactions of the assessee with its AEs. We find from a perusal of the order passed by the TPO that the aforesaid company was rejected as a comparable for the reason that its export sales were found to be less than 25% of its total sales. We find that the assessee while assailing the selection of a comparable by the TPO viz. M/s Goldstone Infratech Ltd. had submitted that as the export sales of the said company were less than 25%, thus keeping in view the fact that for the same reason the TPO had rejected two comparables selected by the assessee viz. (i) Ask Me Info Hubs Ltd; and (ii) CMC Limited, the aforesaid company viz. M/s Goldstone Infratech Ltd. was liable to be excluded from the final list of comparables. We are of the considered view that in the backdrop of the export filter applied by the TPO for selection of the comparables in order to benchmark the intern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed the claim of the assessee in respect of the working capital adjustment. Further, the DRP had also declined to allow the working capital adjustment by observing that the A.O had rejected the same after giving a proper reasoning. 32. We have deliberated at length on the issue under consideration and are of the considered view that as the assessee had consistently been allowed working capital adjustment in the aforementioned preceding and the succeeding years by the TPO, hence, without assigning any reason it was incorrect on his part to have denied the same during the year under consideration. We thus, being of the considered view that the matter requires to be readjudicated keeping in view the stand of the department in the preceding and the succeeding years, therefore, restore the same to the file of the TPO. Needless to say, during the course of the set aside proceedings the TPO shall afford reasonable opportunity of being heard to the assessee who shall remain at a liberty to substantiate its aforesaid claim before the TPO. 33. We shall now advert to the claim of the assessee that the lower authorities had erred in not allowing risk adjustment on account of difference i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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