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TMI Blog2018 (9) TMI 2006X X X X Extracts X X X X X X X X Extracts X X X X ..... ax(Appeals)-22, Kolkata [in short the ld CIT(A)] in Appeal No. 171/CIT(A)- 22/2008-09/14-15/Kol dated 03.03.2017 against the order passed by the DCIT, Circle- 4, Kolkata [ in short the ld AO] under section 143(3) of the Income Tax Act, 1961 (in short the Act ) dated 09.02.2012 for the Assessment Year 2008-09. 2. The only issue to be decided in this appeal is as to whether the ld CITA was justified in deleting the addition of ₹ 1,36,61,522/- made towards adjustment to Arm s Length Price (in short ALP) in the facts and circumstances of the case 3. The brief facts of this issue are that the assessee is a domestic company incorporated on 6.6.2003 and is a 98% subsidiary of Acclaris Inc. The residual 2% was held by two resident Indians. The assessee provides Business Process Outsourcing ( in short BPO) Services including adjudication of financial service authority claims, medical claims and travel and expense claims, e-recruitment services, financial accounting services (i.e accounts payable administration, reconciliation of collections of credit card and otherwise etc) , tax processing services, mortgaging services and routine back office services which could be like indexing and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y under the support and guidance of the AE, it is absolved of most of the business and operational risks arising out of the operations. As it can be seen from above that the appellant does not assume any significant risk from its business operation. ( d) Characterization In light of the above, the appellant being a captive service provider remunerated on a cost plus model does not bear risks like R D risk, credit risk, price risk, capacity utilization risk and forex risk whereas Acclaris Inc, being an entrepreneur is exposed to all risks associated with its business operations. Considering the same, the appellant was characterized as a routine IT enabled service provider providing back-office services exclusively to Acclaris Inc, which assumes less than normal risks associated with carrying out such business. 4. The assessee for the services rendered to its AE adopted Transactional Net Margin Method (TNMM in short) as the Most Appropriate Method (MAM in short). The Profit Level Indicator (PLI in short) adopted by the assessee was Operating Profit / Total Cost [ OP / TC ] and accordingly the PLI of the assessee was arrived at 16.38%. The PLI of the comparable companies chosen by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quently the assessee vide order sheet noting dated 21.10.2011 was requested to provide an explanation on how non-availability of the annual report or the website of Indusind Information Technology Ltd can be regarded as a ground for rejection. The assessee in its reply dated 27.10.2011 submitted as under:- .. For determining comparability of comparable companies with the assessee, the Annual Report and Website Review of respective comparables was analyzed. However, the Annual report and Website Review of comparable company, Indusind Information Technology Ltd. could not be obtained. Hence, due to unavailability of information on the functional profile of the company, it was not possible for the assessee to conclude that the said comparable is into providing ITes/BPO services and that the same can be included in the comprarable set for the assessee . 10. The ld TPO in his order rejected the adoption of multi year data done by the assessee and further observed that the comparable Indusind Information Technology Ltd company details are available on the database and hence non-availability of annual report and website cannot be a ground for rejection of the said comparable. Accordingly, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 2007-08 in ITA No. 695/Kol/2011 dated 11.6.2015. 6.3. As regards Indusind Information Technological Limited, it is the case of the assessee that the business model of the comparable chosen by the TPO is that of software development unlike that of the assessee company which is engaged in the business of BPO service. 6.4. After considering the submissions made by the parties and the judgments relied upon, we are in agreement with the averments made by the ld. Sr. Counsel for the assessee that the aforesaid comparable may be excluded for the purpose of benchmarking the arm s length price of the international transactions entered into by the assessee. The software development company has a completely different functional profile as compared to a company engaged in BPO Services. The risk undertaken and the assets employed by a software development company cannot be compared to a BPO company. 6.5. A similar issue arose for consideration before the ITAT Chennai Bench in the case of S.R.A.Systems Ltd. vs ACIT (2014) 147 ITD 353 wherein the Tribunal has held as under :- 7. We considered this issue in detail. It is the case of the assessee before the lower authorities that the turnover of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment. This shows that the upward adjustment made in the impugned assessment is quite arbitrary. 6.6. In the case of ACIT vs M/s.Maersk Global Service Centers (India) Pvt. Ltd. in ITA No.3774/Mum/2011 vide order dated 09.11.2011 the ITAT Mumbai Bench has held as under :- 30. The assessee in its transfer pricing study considered transactional net margin method (hereinafter called TNMM ) as the most appropriate method with NCP margin as the profit level indicator to benchmark its international transactions with AEs. The assessee conducted analysis for determining the ALP of international transactions pertaining to the provisions of back office support services. Based on data available, the weighted average Arithmetical Mean of NCP margins earned by the comparable independent companies performing similar functions, was determined at 7.62%. As the assessee earned NCP of 7.90% from its international transactions, it was concluded that such transactions with AEs were at ALP. The Assessing Officer made reference to TPO for computation of ALP in respect of international transactions. The TPO, vide his order dated 31.10.2008, computed the adjustments to the ALP amounting to ₹ 10,49,07, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable and included it in the list of comparables. The assessee contended before the learned CIT(A) that the said company was functionally incomparable as it was mainly engaged in software and application development. The learned CIT(A) considered the Annual report of this company and observed that it referred mainly to the income from export sales of software as against the assessee s business of ITES. Accordingly this case was excluded from the list of comparables. 4.2. The ld. AR mainly relied on the decision of the Mumbai Bench of the tribunal in the case of ACIT v.Mearsk Global Service Centres (India) Private Limited [(2011) 133 ITD 543 (Mum)] to bring home the point that the case of Cepha Imaging Private Limited should be excluded as the same has been held by the tribunal in that case as incomparable. 4.4. Adverting to the facts of the instant case we find that the assessee in Mearsk Global Service Centres (India)Private Limited (supra) was a service provider rendering back office support service to its Associated Enterprises (AEs). In para 29 of this order, it has been recorded by the tribunal that the activities undertaken by the assessee were essentially ITES, such as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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