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TMI Blog2016 (4) TMI 1338X X X X Extracts X X X X X X X X Extracts X X X X ..... T Cube, LLC, is incorporated under The Companies Act, 1956. The Assessee co. is engaged in the business of information technology enabled services (ITeS), by providing, managing and assisting business process outsourcing of functions such as accounting, finance, legal production, staffing, communication marketing, distribution or sales. The assessee is also into developing software for market research, financial analytical services, specific knowledge/business process payroll, recruitment, employee training and development, retirement plan administration customer call centers, technical support centers, billing claims processing inbound and outbound logistics, warehousing and inventory, management, document processing and digitizing, auditing and medical/entertainment transcription. 2.1 During the year under consideration, the assessee company has undertaken certain international transactions with its overseas affiliates i.e. associate enterprise (AE) in the field of 'Software Consultancy Services IT enabled services' amounting to ₹ 7,84,92,342/-. As per the Indian transfer pricing regulations, the income arising from international transactions is required to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... propriate method (MAM) wherein the Assessee compared the internal profit level indicator from controlled transactions vis a vis PLI that the assessee earns from comparable uncontrolled transactions with Non AE ( internal comparables) for the purpose of determination of ALP. As required by TPO, the Assessee assisted the TPO and undertook a search process on a database for external independent comparables. To test the arm length character of controlled transactions, the Assessee identified 9 external companies considered as comparable to the transactions undertaken by the Assessee co.. which are tabulated as under: Sr. No. Company PLI (OP/OC) 1 CCE Software Pvt. Ltd. 4.76% 2 e4e Healthcare Business Services Pvt. Ltd. 19.38% 3 Idhsoft Ltd. 17.97% 4 Manthan Software Services Pvt. Ltd. -13.84% 5 Mphasis Finsource Ltd. 11.87% 6 Omega Healthc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om international transactions at 17.80% after excluding some of the comparables taken by the assessee and simultaneously by including some more new comparables. 2.5 The arithmetic mean of the PLI so determined from these final set of comparables was compared with the PLI determined at 6.50% by the Assessee as per internal TNMM as observed in the draft assessment order. This difference of 11.30% was factored for computation of arm's length price by the Assessing Officer which led to transfer pricing adjustment to the tune of ₹ 91,27,129/-. Hence, this amount was added by the AO in respect of international transactions relating to the Associated Enterprise (AE) to arrive at the arm's length price of the international transactions in its draft assessment order under section 143(3) r.w.s. 144C dated 30.12.2011. In consequence, the impugned transfer pricing adjustment was proposed to be taken as additional income of the assessee in the draft assessment order. 2.6 The assessee raised objection against the impugned draft assessment order before the DRP. The DRP passed directions under S. 144C(5) of the Act dated 5/9/2012 and required the Assessing Officer to include ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly with the final assessment order of the AO with regard to aforesaid adjustments made to the purported revenue from international transactions carried on by the assessee with its AEs, the assessee is in appeal before us. 4. The Grounds of Appeal raised before the Tribunal by the assessee read as under :- Based on the facts and circumstances of the case, and in law, ITCube Solutions Private Limited (hereinafter referred to as the 'Appellant') respectfully craves leave to prefer an appeal against the order passed by the learned ('Ld.') Income Tax Officer Ward 1(4) Pune ('AO') in pursuance of the directions issued by Hon'ble Dispute Resolution Panel ('DRP'), Pune, dated September 5, 2012 under Section 253 of the Income-tax Act, 1961 ('Act') on the following grounds: On the facts and in the circumstances of the case and in law, the Ld. Transfer Pricing Officer ('TPO') and the AO, and further the Hon'ble DRP erred and consequentially: (1) Erred in computing the arm's length price of international transaction and confirming the adjustment of ₹ 6,582,750/-. (2) Erred by incorrectly recomputing the Profit Le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of interest under section 234B of the Act; (17) Erred by initiation penalty proceeding under Section 274 read with Section 271(1)(c) of the Act. 5. The Ld. Authorized Representative for the assessee, Shri Kishor Phadke at the outset submitted that notwithstanding several Grounds raised in the present appeal, the assessee is pre-dominantly aggrieved by the inclusion of three companies namely (i) Accentia Technologies Limited, (ii) Coral Hubs Limited and (iii) Maple e-Solutions Limited in the final set of comparables for the purpose of determination of arm's length price. He submitted that none of these above three companies could be included in the final set of comparables by the TPO/DRP in absence of comparability and non reliability of data of these companies. He submitted that there are material differences in the FAR (Functions, Assets and Risks) analysis of the international transactions undertaken by the assessee and these 3 comparables selected by the TPO/DRP which calls for exclusion thereof. He further canvassed that once these three entities or even two companies namely 'accentia' and 'coral hubs' are excluded from the list of final set of comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent scanning, etc. activity thus the products are different. Further, it has outsourced most of its business whereas the assessee is dependent on its own personnel and employees. The AR canvassed that the assessee operates in different field i.e. software consultancy services and IT enables services which is quite different from the business of e-publishing activity etc.. The Ld. Authorized Representative for the assessee submitted that the exclusion of Coral Hubs Limited from the list of comparable is justified in the light of the ITAT decisions in the case of (i) Cummins Turbo Technologies Ltd. v. Dy. DIT [2015] 53 taxmann.com 492 (Pune - Trib.), (ii) BNY Mellon International Operations (India) (P.) Ltd. (supra), (iii) Flagstone Underwriting Support Services India (P.) Ltd. v. Dy. CIT [2015] 152 ITD 754/[2014] 52 taxmann.com 408 (Hyd.) and (iv) PTC Software (India) (P.) Ltd. (supra). In all these decisions, Coral Hubs Limited has been rejected for benchmarking purposes. 8. To canvass the exclusion of Maple e-solutions Ltd. from the list comparables, the Ld. AR submitted that there is considerable difference in profile of the aforesaid entity qua that of assessee and therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he TPO rejected the internal TNMM and selected external TNMM for the determination of arm's length price. List of external comparables comprising of 9 independent entities were proposed for determination of ALP of the international transactions undertaken by the Assessee with its AE based on arithmetic mean of PLI of these independent entities. The DRP has broadly accepted the order of the TPO subject to certain adjustments in the list of comparables. It is the case of the assessee that based on the FAR analysis, there is no justification for inclusion of three entities namely (i) Accentia Technologies Limited, (ii) Coral Hubs Limited and (iii) Maple e-Solutions Limited for the purpose of determination of PLI margin. It is further case of the assessee the variance between the arithmetic mean of PLI vis- -vis that of assessee will be within the range of 5% variance and therefore in view of the proviso to section 92C(2) of the Act no transfer pricing adjustment will be required if his contentions are accepted for exclusion of these three companies. The Ld. Authorized Representative for the assessee submitted that if Accentia Technologies Limited and Coral Hubs Limited are removed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nternational Operations (India ) (P.) Ltd. (supra) relied upon by the Assessee has after consideration of other decisions of tribunal held that extraordinary events like merger and acquisition in this entity has rendered it to be unworthy for comparison purposes. Following parity and keeping with the decision of coordinate bench, We are of the considered view that 'Accentia' deserves to be excluded from the list of final comparables for determination of PLI and in turn arm's length price of international transactions. We direct accordingly. 10.3 We also find justification in exclusion of 'Coral Hubs' from the final list of comparables owing to the fact that Coral's work is substantially outsourced and thus business module has acquired a different character on the touchstone of FAR analysis. The relevant observation of Pune ITAT in the case of PTC Software (India) (P.) Ltd. (supra) for the exclusion of 'Coral Hubs' (earlier known as M/s Vishal Information Technologies Ltd.) is extracted hereunder :- '45. We have heard the rival contentions and perused the record. In the TP study carried out by the TPO in the ITES segments, fresh search crite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out that the intermediary functions performed by the said concern can be compared to that of a distributor which takes title to service/product for resale to the customers. The aforesaid assertion is sought to be substantiated by the details of payments made by the said concern for data entry and vendor payments, personnel costs and sales. It is, therefore, contended that the said concern is functionally dissimilar to that of the IT-Enabled services segment of the assessee. It has also been argued that the said concern has earned supernormal profits as high as 59.19% and therefore, the same is not includible in the list of comparables so as to avoid skewing of the comparability analysis. On the other hand, the stand of the Revenue as brought out by the TPO in para 6.9.6. of the order is to the effect that the said concern being categorized as an IT-Enabled services concern, the same is liable to be included. 31. We have carefully considered the rival submissions on this aspect. At the outset, we may refer to page 810 of the Paper book, wherein the Notes to Accounts for the year ended 31.3.2007 of the said concern have been placed. As per the available information, the said conce ..... X X X X Extracts X X X X X X X X Extracts X X X X
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