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TMI Blog2016 (1) TMI 1436X X X X Extracts X X X X X X X X Extracts X X X X ..... iterion prescribed in Rule lOB of Income Tax Rules and also there being no correlation between turnover and profit margin. 3. The Hon'ble DRP erred in holding that foreign exchange loss/ gain is operating in nature when, such loss/gain though attributable to the operating activity is not derived from the operating activity. 4. The Hon'bie DRP erred in law as well as facts in directing the TPO to consider the foreign exchange fluctuation as operating in nature while determining the margin in the case of the taxpayer by applying the same principles as emerging from the orders of ITAT in the case of Sap Labs India Pvt. Ltd. 5 Whether the Id, DRP is justified in directing the TPO to grant risk adjustment without advising any reasonable accurate method in the absence of which the TPC had not provided the same. 03. Grounds 1 and 2 assails exclusion of M/s. E-clerk Services Ltd and Infosys BPO Ltd, from the list of comparables selected by the TPO, for bench marking the pricing of the international transactions of the assessee with the Associated Enterprise ('AE' in short). TPO had applied turnover filter of Rs. 200 crores. 04. Facts apropos are that assessee providing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ACROPETAL TECHNOLOGIES LTD (SEG.) 22.27% 3 E.CLERX SERVICES LTD 55.97% 4 FORTUNE INFOTECH I,TD 22.80% 5 ICRA ONLINE LTD(SEG) 43.39% 6 INFORMED TECHNOLOGIES INDIA LTD 26.15% 7 INFOSYS BPO 31.23% 8 COSMIC GLOBAL LTD 14.97% 9 SUNDARAM BUSINESS SERVICES LTD -12.31% 10 JEEVAN SCIENTIFIC TECHNOLOGY LTD.(SEG.) 21.05% AVERAGE 26.86% 07. TPO thereafter worked out the working capital adjustment component of comparables at 0.32%. ALP worked out by the TPO and recommendation made by him u/s.92CA is as under : Arm's Length Mean Margin on cost 26.86% Less: Working Capital Adjustment 0.23% (As per Annex. C) Adjusted margin 26.63% Operating Cost 15,48,06,930 Arms Length Price (ALP) 19,60,32,015 126.63% of Operating Cost) Price Received 16,64,84,587 Shortfall being Adjustment u/s 92CA: 2,95,47,428 Operating cost considered by the TPO was excluding donations and loss in current investments. 08. When the AO issued a draft assessment order proposing an upward adjustment of Rs. 2,95,47,428/- as recommended by the TPO, assessee chose to move the DRP. 09. Though various contentions were taken by the assessee bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... application of turnover filter is concerned, in the case of M/s. Pentair Water India P. Ltd, Hon'ble Bombay High Court had confirmed the order of the Tribunal, directing exclusion of HCL Comnet Systems & Services Ltd, Infosys BPO Ltd, and Wipro Ltd, from the list of comparables for a reason that its turnover was much higher than that of the tested party. Observations of Hon'ble Bombay High Court when the matter was carried in appeal before it by the Revenue in Tax Appeal No.18/2015, are reproduced hereunder : "5. On perusal of the impugned Order passed by the Tribunal dated 23.05.2014, we find that the Tribunal has recorded the reasons for not accepting the said three companies are comparable by stating as follows (1) HCL Comnet Systems & Services Ltd :- We find force in the submission of the Id. AR that this company cannot be a comparable as the turnover of this company is 260.18 crores while in the case of the Assessee, the turnover is around Rs. 11 crores only. While making the selection of comparables, the turnover filter, in our opinion, has to be the basis for selection. A company having turnover of Rs. 11 crores cannot be compared with a company which is hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out by the coordinate bench in the case of Genisys Integrating Systems (India) P. Ltd (supra), based on Dun and Bradstreets analysis can be followed. It was held as under in the said case by the coordinate bench in para 7 to 8.3 of its order : 7. As regards the filters selected by the assessee in making the transfer pricing study, the learned counsel for the assessee submitted that the assessee has adopted a turnover range of Rs. 1.00 crore at the lower end and Rs. 200 Crores at the higher end while choosing the comparables. He submitted that this adoption of upper limit of Rs. 200 Crores is based on the Dun and Bradstreet's analysis which has classified the software companies into the following categories; 1. Large size firms (Rs. 20,000 Mn) 2. Medium size firms (Rs. 2,000-20,000 Mn) 3. Small size firms (Rs. 2,000 Mn) 7.1 The learned counsel for the assessee submitted that the T PO has rejected the upper limit of Rs. 200 Crores on the ground that there is no relationship between sales and margins in the service sector as fixed assets are very minimal. He submitted that this is not correct because, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in selecting a comparable of uncontrolled companies and the assessee has accordingly, applied the turnover range of Rs. 1.00 crore to 200 crores based on Dun and Bradstreet's analysis. He submitted that in the alternative, the categories recognized by 1 NASSCOM may also be applied in selecting comparables. 8.3 The learned DR rebutted this argument and submitted that the Act or Rules do not provide for the turnover filter. He submitted that as rightly pointed out by the TPO in the case of service sector, the size of the company does not matter because, the infrastructure layout is very less and it will not affect the profit ratio in any way. He drew our attention to the particular portion of TPO's order wherein the TPO has the reasoning given for rejecting the turnover filter. 14. We are therefore of the opinion that DRP was justified in directing exclusion of companies having turnover in excess of Rs. 200 crores. Grounds 1 and 2 of the Revenue stand dismissed. 15. Vide its ground 3 and 4, grievance raised by the Revenue is that foreign exchange loss/ gain was considered to be operating in nature by the DRP though such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly if a reasonable accurate calculation could be made. His observations, with regard to risk adjustment read as follows : Risk adjustment involves two vital preconditions. They are that difference in risk level exists between the tested party and the uncontrolled comparables; and that it is possible to calculate in terms of numbers the differences in risk so that adjustment can be made. But in case of the taxpayer, both the prerequisites are missing. Neither the difference in risk level of the tested party and uncontrolled comparables has been established nor is it possible to convert the difference in risk level, if there is any, into numbers. If there is any difference, for a moment academically speaking, it rests in the realm of quality and not quantity. There is no reliable method to convert the qualitative difference into quantitative difference and to make adjustment on account of risk level. As per the provisions of Rule 10B(3), if any adjustment should be made, it should be reasonably accurate to eliminate the material effects of such differences. But in case of risk adjustment, neither reasonably accurat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation, held as under : 7.8.3 The objections of the tax payer have been considered. The decision of the jurisdictional ITAT which is binding on the Panel was examined. It is seen that the Hon'ble Bangalore ITAT in case of Intellinet Technologies India Pvt Ltd. vs ITO (ITA no. 1237/Bang/2007) rejected the tax department's argument that a single customer risk borne by the tax payer in its status of a captive service provider was equivalent to the marketing and technical risk attached to the comparables. The Hon'ble ITAT held that the risk of having a, single customer in anticipated risk which may or may not happen unlike the marketing and technical risks which have to be contemporaneously dealt with by the comparables. The ITAT did not accept that the risk adjustment should be 5.5% or at the difference of PLR of the RBI and the banks, and directed the TPO to consider all the contentions and decide the percentage of risk adjustments to be made in accordance with law, In the case of Bearing Point Business Consulting Pvt. Ltd vs DCIT (ITA no. 1124/Bang/2011) this decision was once again followed by the jurisdictional ITAT. 7.8.4 After consideration of the various facets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e on TP matters only the grounds relating to selection of comparables, exclusion of rental income and rental expenditure while calculating the PLI and providing working capital adjustment need be considered. In other words according to him, out of grounds 1 to 9, he was pressing grounds 7(c), 7(d), 7(e), 7(h) and 7(i) only. 25. Ld. AR submitted that Accentia Technologies Ltd, selected by the TPO was functionally dissimilar to the assessee. According to him assessee was admittedly an ITES provider. Relying on the decision of Delhi bench of the Tribunal in the case of Rampgreen Solutions (P) Ltd v. DCIT [ITA.1066/Del/2015, dt.04.11.2015]. Ld. AR submitted that Accentia Technologies Ltd, was considered to be an improper comparable in respect of ITES segment, for the very same assessment year viz., 2010- 11, in the said case. According to him, business profile of the assessee also clearly showed that it was providing ITE services. Further as per the Ld. AR Asscent Infoserve Ltd, had amalgamated with Accentia Technologies and due to such amalgamation, latter could no longer be considered as an ITES provider. 26. Per contra the Ld. DR submitted that the objections of the assessee wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subsequently, sanctioned by the Hon'ble High Court on 21.8.2009. The Mumbai Bench of the Tribunal in Petro Araldite (P) Ltd. Vs. D'Cl'T (2013) 154 TTJ (Mum) 176, has held that a company cannot be considered as comparable because of exceptional financial results due to mergers/demergers. Similar view has been bolstered by the Delhi Bench of the Tribunal 'in several cases including Ciena India Pvt. Ltd. Vs. DCIT (ITA No.3324/Del/2013) vide its order dated 23.4.2015. In view of the fact that there was merger of Asscent Infoserve Pvt. Ltd. with Accentia Technologies Ltd. by way of amalgamation during the year itself, we hold that this company cannot be considered as comparable due to this extra-ordinary financial event. Accordingly, the same is directed to be excluded from the final list of comparables." 19. Having gone through the annual report and keeping in view the extraordinary event in the year under consideration, we are in agreement with ld. counsel that this comparable cannot be taken into consideration while determining the average margin earned by the comparables. Ld. counsel has submitted that in the case of Techbook International Pvt. Ltd. (supra), this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s high-end services within the BPO which required high skills whereas assessee here was doing routine low end analytical work. Reliance was placed on the decision of coordinate bench in the case of Symphony Marketing Solutions India P. Ltd v. ITO [(2013) 27 ITR (Trib) 753] and also that of capital IQ Information Systems (India) P. Ltd v. ACIT and vice versa in ITA.124/Hyd/2014 & ITR 170/Hyd/2014, dt.31.07.2014 of the Hyderabad bench. According to him, the financial results of the above company for the previous year relevant to the impugned assessment year also show that it had significant revenue from EDS. 30. Per contra Ld. DR submitted that segmental results were available, in the published final accounts of M/s. Acropetal Technologies Ltd. There was no reason why the above company should be excluded from the list of comparables. 31 We have perused the orders and heard the rival contentions. Argument of the assessee is that Acropetal Technologies Ltd (seg) was predominantly doing EDS which was of a high-end and not the type of services that was being done by the assessee. Observations of Hyderabad bench of the Tribunal in the case of Capital IQ Information Systems (India) P. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... EDS was lower at 36% in F. Y ending 31.03.2009 when compared to 43% for year ending 31.03.2010. Coordinate bench in the case of capital IQ Information Systems (India) P. Ltd, (supra) had directed its exclusion for A.Y. 2009-10, when its EDS revenue was low. However, in our opinion when segmental results were available, where expenditure have also been allocated, it would be improper to exclude the company only for a reason that it was into high-end services. Within a given segment there cannot be further classification based on high-end and low-end services. In taking this view we are fortified by the Special Bench decision in the case of Maersk Global Centres (India) P. Ltd v. ACIT [ITA.7466/Mum/2012, dt.07.03.2012]. Analysis of voluminous data and deciphering meaningful information therefrom which helps build core business strategy is a highly skilled function, requiring advanced programming skills and knowledge of data mining. Data analytics is no ordinary job like daily business accounting or book-keeping. It is in no way comparable to a low end business process outsourcing function. Accordingly, we are of the opinion that Acropetal Technologies Ltd (seg), cannot be excluded fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o require us to consider whether or not Datamatics should be included in the comparable, we make no comments on merit except observing that assessee from record has shown its prima facie case. Further claim may be examined by the AO. This course we adopt as objection to the inclusion of Datamatics as comparable has been raised now and not before Revenue authorities. Therefore, we deem it fit and proper to remit the matter to the file of the AO for consideration of claim of the taxpayer and make a de novo adjudication of the ALP after providing reasonable opportunity of being heard to the assessee. We order accordingly. 38. Accordingly we are of the opinion that assessee cannot be estopped from praying for exclusion of a comparable though it was originally selected by it. Vis-a-vis the question whether a filter of 75% of foreign exchange earnings to sales could be applied, decision of Mumbai Bench in the case Vodafone of India Services P. Ltd (supra) is very relevant, which is as under : The assessee is a captive service provide of call centre to its AE, therefore, the entire revenue of the assessee's call centre comes from the export. Accordingly, the filter of minimum 75% exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... working capital requirement and accordingly the cost of working capital that must be recovered from the customers by factoring in the sales price. Any excessive advance which is received from the Holding company by the WOS cannot be factored in reducing the sales price and less sales price cannot be defended on the ground that due to negative cost of capital it is managing to have arm's length profit margin even if it is having low profit margin oil activity as discussed in the example given above. In a related party scenario, the entire payables/advances cannot be considered in working capital adjustment as in any business there is an optimum working capital that can be found out only on the basis of comparison with third parties as third parties alone represent the optimum working capital requirement. Accordingly the working capital adjustment is restricted to 0.23%. 42. It is clear that TPO had accepted a working capital adjustment of .25%. Nevertheless the AO when he passed the final assessment order pursuant to the directions of the DRP calculated the ALP of ITES as under : Arm's Length Mean Margin on cost 22.067% Less: Risk Adjustment 1.00% Adjusted margin 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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