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TMI Blog2019 (5) TMI 1832X X X X Extracts X X X X X X X X Extracts X X X X ..... - TPO rejected the internal CUP and internal TNMM method selected by the assessee - TPO selected 8 companies as comparables - HELD THAT:- Cross Domain Solution Pvt Ltd is engaged in KPO services. Therefore the same is not a fit comparable in the given facts circumstances. Hence we direct the TPO to exclude this company as comparable. R systems International Ltd - Comparable has been identified after the documentation of TP study, therefore, the exercise is post facto analysis - assessee before TPO also submitted that the AMP expenditure also includes some expenses such as marketing salary, marketing travel, commission on sales and advertising sales promotion which are not in AMP nature. However ld. TPO failed to give any findings on it. The ld. DR also did not argue in this regard before us, therefore, we are assuming it to be in the nature of selling expenses and not in the nature of AMP expenses. Accordingly, we are of the opinion this comparable should be taken in to account while benchmarking the transaction. CG-Vak Software and exports Ltd - Its turnover is less than ₹ 1 Crores and its margin had been fluctuating during the past and subsequent years - As dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rejecting the Internal Transaction Net Margin Method ( TNMM ) adopted by the Appellant as the most appropriate method for benchmarking the international transaction of the Appellant. 1.4 The learned CIT (A) has erred by not considering risk adjustments proposed by Appellant for adjusting in different risks assumed by Appellant while dealing with AE and non AE. Alternatively if External TNMM is considered as most appropriate method 1.5 On the facts and in the circumstances of the case and in law, the learned CIT (A) has erred in accepting the External Transactional Net Margin Method ( TNMM ) method adopted by the learned transfer pricing officer as the most appropriate method for benchmarking the international transactions undertaken by the Appellant. 1.6 The learned CIT (A) has erred in confirming action of the learned transfer pricing officer in applying arbitrary filters for selecting the companies as comparable to the business of the Appellant. 1.7 The learned CIT (A) has erred in confirming the action of the learned transfer officer in considering the financial data of the comparable companies only for the single year ended 31 March 2010 instead of multiple year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rdingly, the assessee in its TP study report claimed that price charged in case of non AEs is lower than AE, therefore, the transactions with the AE are at Arm Length Price (ALP). 3. However, the TPO on perusal of TP study report noted certain facts in respect of internal CUP as under: (i) In case of AE, fee is receivable on per hour basis whereas in case of Non AE fees are being received on the basis of per unit sales or leads provided by the assessee. (ii) The nature of services such as inbound and outbound services, voice chat services, operation support services etc. provided to its AE are different from the nature of the services provided to non AE. As such the services rendered to Non-AE include the services as provision of client s data in respect of sale of products or telemarketing of the third party product. (iii) In respect of AE, the assessee charged the fees on per hour basis irrespective of the outcome while in case of non AEs fees has been charged only when sale or lead is confirmed. (iv) The assessee was assured of remuneration in case of AE while the same is not the case with non AEs. Therefore, the risk profile in both the cases is totally different ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, internal CUP applied by assessee for the purpose of benchmarking is rejected. 3.9 In respect of internal TNMM, the TPO held that assessee has only submitted calculation of quantification of the risk but has not established any link for the difference in the return between Government security and AAA rated bonds with the risk profile of AE and non AEs segment. 3.10 The TPO further held that as per the provision of rule 10B(2) and 10B(3), reasonable accurate adjustment can be made to eliminate the differences only where differences are such which are not likely to affect the price and profit from such transaction. But it is not possible to work out the effect on the margins in present facts and circumstances. 3.11 The TPO in support of his findings also observed that there is difference of almost 57.41 times between AE and non AEs turnover which is an important criterion for deciding the comparable cases as already held in various judicial pronouncements. 3.12 Accordingly, TPO rejected the internal CUP and internal TNMM as most appropriate method. 4. Being aggrieved by the order of TPO/AO, assessee carried the matter to ld. CIT (A) and submitted that merely diff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o determine the cost allocation properly and further held that if non AEs transactions are more only up to 5% but cost allocation is more than 50% then further examination is required. In the present case also assessee has not justified the basis of allocation of cost between AE and Non-AEs as the non AE business forms only 1.7% of AE business and 1.6% of total turnover. Accordingly, ld. CIT (A) dismissed the appeal of assessee. Aggrieved by the order of ld. CIT (A), assessee is in appeal before us. 5. The Ld. AR before us filed a written submission as detailed under: Rejection of internal CUP analysis undertaken by the Appellant The Appellant had entered into similar transactions with AE as well as unrelated third parties. Accordingly for the purposes of benchmarking its international transaction, the Appellant selected Internal Comparable Uncontrolled Price method ('Internal CUP') as the most appropriate method. The brief of the services rendered to both AE as well as Non AEs is as under: AE Non AEs located in UK ETech Inc. K M Marketing Pvt. Ltd. Satellite Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e do not find any merit in holding that the assessee manipulated the prices and shifted the profits to the overseas jurisdiction for avoiding taxes in India. Moreover, the taxes rates in the USA are higher than the tax rates prevailing in India. Moreover, the AE of the appellant company has incurred losses in providing end to end services to third parties. If the assessee had directly undertaken contracts with the third parties in USA, it would also have incurred operating losses as against operating profits earned while undertaking transactions with AEs. 11. We find that the appellant company has earned average hourly rate from its AE business at ₹ 274.39 per hour. As against the same, the average hourly rate from Non AE business was ₹ 108.82 per hour. Thus, the average hourly rate earned from AE business was more than Non AE business. The only reason for rejecting the assessee s contention is that the pricing mechanism in case of AE as well as Non AEs was different; therefore, CUP is not applicable. In our considered opinion, merely because pricing mechanism is different, internal CUP should not have been rejected. 12. We find that the TPO has mentioned in the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Lummus Technology Heat Transfer BV Vs. DCIT 42 taxmann.com 342 has held as under:- 5. Rule 10B(l)(e) of the Income Tax Rules, which deals with the Transactional Net Margin Method, provides requires that the net profit margin realised by the enterprise (i.e. the assessee) from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base is compared with the net profit margin realised by the enterprise ( i.e. the assessee) or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base - of course, subject to comparability adjustments which could affect the amount of net profit margin in uncontrolled conditions. It is not at all necessary, as the authorities below seem to suggest, that such net profit computations, in the case of internal comparables (i.e. assessee's transactions with independent enterprise), are based on the audited books of accounts or the books of accounts regularly maintained by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rison within the same entity, mere difference in size of the uncontrolled transactions does not render the transaction incomparable. If the size of uncontrolled transaction is too big, it may call for an adjustment for volume business. If the size of the uncontrolled transaction is too small, it may provoke an inquiry by the TPO to ensure that it is not a contrived transaction outside the normal course of business or with regard to other significant factors surrounding smallness of such transaction. However, in our considered view, in none of these cases, a comparable can be rejected on the basis of its size per se. In this view of the matter, the authorities below were clearly in error in rejecting the internal comparable, i.e. profitability of assessee's transactions with non AEs, on the ground that the volume of business with non AEs was too small vis-a-vis business with AEs. In view of these discussions, as also bearing in mind entirety of the case, the assessee was quite justified in adopting internal TNMM and comparing the profit earned on its transactions with AEs with profit earned with non-AEs. Accordingly, the ALP adjustment of ₹ 2,72,42,940/- deserves to be del ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me time the assessee suggested three companies as comparables but the TPO rejected the same. The details of the companies suggested by the assessee stand as under: i. Informed technologies India Ltd ii. CG-Vak Software and exports Ltd iii. R systems International Ltd 7.2 On appeal to the ld. CIT-A rejected some of the comparables suggested by the TPO and all the comparables suggested by the assessee. 7.3 Against the order of the ld. CIT-A, the assessee is in appeal before us in respect of the exclusion of the company confirmed as comparable. The detail of the company stands as under: i. Cross Domain Solution Pvt. Ltd 7.4 Similarly, the assessee is also in appeal for the inclusion of certain companies which were rejected by the ld. CIT-A as detailed under: i. CG-Vak Software and exports Ltd ii. R systems International Ltd 7.5 Now we are proceeding further to adjudicate one by one the applicability of these comparables in the given facts and circumstances. First we take up the comparables selected by the TPO and confirmed by the ld. CIT-A, but objected by the assessee. i. Cross Domain Solution Pvt. Ltd 8. The TPO after applying the abovementione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idering this company as functionally comparable to the Appellant. In this regard, the Appellant submits that this company is engaged in rendering high-end KPO service and hence cannot be compared with the Appellant who is a low end BPO services provider. For detailed discussion kindly refer Para 2.6,4 of submission filed dated 15 May 2015 before the learned CIT(A). (Refer page no 187 of the factual paper book) Further, reliance in this regard is also placed on the following judicial precedents: -ACIT vs Monster.com (India) Private Limited (Hyderabad ITAT) [2017] (86 Taxmann.com 186) (Refer para 17.1 at page 30 of legal paper book) - BP India Services (P.) Ltd vs ACIT (Mumbai ITAT) [2015] (55 Taxmann.com 150) (Refer para 9 at page no 39 of legal paper book) 10. On the other hand, the Ld. DR vehemently supported the order of authorities below. 11. We have the heard the rival contentions of both the parties and perused the materials available on record. In the instant case we note that none of lower authorities brought any material on record that the impugned comparable is not engaged in providing the KPO services. The Ld. DR also before us failed to bring anything o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee contends that Cross Domain cannot be compared to a routine ITES service provider. III. 1 We are of the view that in the absence of any reasons given to the contrary either by the TPO or the DRP for regarding this c9mpany as a comparable, this company should be excluded from the list of comparables, accepting the plea of the Assessee. Similar view was also taken in the case of Symphony Marketing Solutions India(p) Ltd (supra) by the Bangalore Bench. We hold accordingly . 14.3 Facts are being similar in this year, the same has to be excluded. Moreover the web report placed indicates that this company is in market research and analysis and IT services which include software development and maintenance. There is no segmental information. In the absence of segmental data, it cannot be stated that the company is functionally similar. In view of the order in earlier year and based on annual report and web data of this year, it is better the same is excluded. We accordingly direct the TPO / AO to exclude the same. 11.2 Similar view was also taken by the ITAT Mumbai in case of BP India services (p) Ltd vs ACIT (55 taxmann.com 150) as under: 9. We have considered rival ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the information obtained from R system u/s 133(6) also observed that it has given segmental result in respect of software development services and BPO services. The TPO further observed that on one hand the assessee is objecting the inclusion of entities engaged in diversified activities whose segmental data is not available and on other hand it seeks to include R system at an entity level. Accordingly, the TPO held that R system is not to be included as comparable case. 12.4 The aggrieved assessee carried the matter to ld. CIT (A) who held that the reason given by the TPO in respect of concept of AMP may be wrong but his findings were correct as extraordinary margins require adjustments. As such only ordinary margins can be considered for the comparison. The ld. CIT(A) further held that R system cannot be compared as the assessee company is having low risk whereas the comparable R system is having high risk due to incurring extraordinary cost. 12.5 The Ld. CIT (A) also held the exercise of assessee is post facto analysis. As such the assessee did not file the comparable in the TP study report rather it was submitted only during the assessment proceeding. 13. Aggrieved ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arables as per its convenience. Once in a year it has been held that it is a case fit for comparable then in later years it cannot be excluded as comparable company unless there is any material change within the entity related to its structure or business. Just because a company in any particular year incurred any heavy expenditure on account of AMP cannot be held as non comparable. 16.2 The relevant finding of the ld. CIT-A for the AY 2009-10 stands as under: After considering the above, the operating margins of the comparable companies comes to 29.045% [i.e (53.17 + 4.92)/2 i.e OP/TC of remaining comparables viz Cosmic Global Limited and R Systems International Ltd respectively] and accordingly the AO/TPO are directed to rework. 16.3 It is also pertinent to note here that assessee before TPO also submitted that the AMP expenditure also includes some expenses such as marketing salary, marketing travel, commission on sales and advertising sales promotion which are not in AMP nature. However ld. TPO failed to give any findings on it. The ld. DR also did not argue in this regard before us, therefore, we are assuming it to be in the nature of selling expenses and not in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s ₹ 82.78 lakhs which is less than ₹ 1 crore. However just because this company does not pass the turnover filter of 1 crore this should not be rejected as the business is exactly similar to that of the Appellant. Further the turnover of the relevant segment of the company only not very much less than 1 crore and hence this company should be selected as comparable. Further, in Appellant's own case for AY 2009-10, your Honour's has considered this company as a comparable to the Appellant. Kindly refer para 19 of ITAT order at page no 10 of legal paper book. Further reliance in this regard is also placed on the following judicial precedent: -Cadene Design Systems (India) (P) Ltd. Vs DCIT (Delhi ITAT) [2018] (89 Taxmann.com 443) (Refer para 11.3 at page 63 legal paper book) 19. Ld. DR before us vehemently supported the order of authorities below. 20. We have heard the rival contention and perused the materials on record. In the instant case we note that the same company was also rejected in the preceding assessment year 2009-10 by the lower authorities on same turnover filter criteria and coordinate bench of this tribunal in ITA No. 2411/Ahd/2014 dec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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