9911796707
TMI Blog2021 (2) TMI 350X X X X Extracts X X X X X X X X Extracts X X X X ..... Systems International Ltd. under the ITeS segment - In transfer pricing, comparability of the assessee has to be made with other companies in identical environment. Therefore, same financial period of both the assessee and the comparable should be considered for comparison. In view of the above facts and circumstances, we direct the learned TPO to compute the margin of this company after taking into consideration the financial results of four quarters, which have been considered in the case of the assessee. The relevant ground of the appeal ground is accordingly allowed for statistical purposes Under ITES Segment inclusion of M/s. Vishal Information Technologies Ltd. in set of comparables - Testing of products and services in the field of the pollution-control are functionally different from the providing marketing support services. For providing testing services higher technical skills and experiences are required whereas support services can be provided using comparatively less technical persons. In view of different nature of services, we hold the company as functionally dissimilar and accordingly direct the Learned AO/TPO to exclude the company from the final set of the compara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) erred on facts and in law in determining the arm's length price of the Appellant's international transactions with its associated enterprises in the Administrative/market support and IT enabled segments in the following manner: 3.1 By upholding the Ld. Transfer Pricing Officer's ("TPO") approach of applying additional and modified quantitative filters in order to arrive at a set of comparable companies. 3.2 By upholding the Ld. TPO's approach of selecting companies which were functionally not comparable to the Appellant and operated on a different business model under Transactional Net Marginal method ("TNMM"). 3.3 By upholding the Ld. TPO's approach to include companies as comparable despite the fact that such companies had witnessed abnormal margin/growth during the year under consideration. 3.4 By upholding the approach of the Ld. TPO in denying economic adjustment for the difference in risk profile between the comparable companies and the Appellant. 3.5 By upholding the approach of Ld. TPO in selecting the current year (i.e. financial year 2007-08) data for comparability despite the fact that at the time of comparison done by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income of ₹ 1,93,55,507/-, which was selected for the scrutiny assessment. The statutory notices under the Income-tax Act, 1961 (in short 'the Act') were issued and complied with. The Assessing Officer observed international transactions carried out by the assessee with its Associated Enterprises and therefore for determining arm's-length price of those international transactions, he referred the matter to the learned Transfer Pricing Officer (TPO). The Ld. TPO, after providing opportunity to the assessee, proposed transfer pricing adjustment of ₹ 3,57,86,942/- in his order dated 31/10/2011 under section 92CA(3) of the Act. The Ld. Assessing Officer in his order dated 30/01/2012 included the transfer pricing adjustment proposed by the Ld. TPO. Aggrieved with the transfer pricing adjustment, the assessee filed appeal before the Learned CIT(A), who partly allowed the appeal. Aggrieved, both the assessee and the Revenue are before the Income-Tax Appellate Tribunal (in short 'the Tribunal') by way of raising the grounds as reproduced above. 4. In the additional grounds, the assessee has raised two issues. The first issue is for excluding the comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /11/2014 whereas the assessee is approaching now in the year 2019 for admitting the additional ground. Accordingly, he submitted that additional ground of the assessee might not be admitted. 4.4. We have heard rival submission of the parties on the issue of additional ground raised. On the issue of exclusion of comparable which was selected by the assessee before the learned TPO, the Tribunal in the case of DCIT Vs. Quark Systems (P) Ltd. (supra) has held as under: "30. Learned special counsel for the Revenue Shri Kapila has vehemently argued that "Datamatics" was taken as one of the comparables by the taxpayer and no objection to its inclusion was raised before the TPO or before the learned CIT(A) in appeal. Therefore, the taxpayer should not be permitted to raise additional ground and ask for exclusion of the above enterprise in the determination of the average margins. We are unable to accept above contention. In the first place, these are initial years of implementation of transfer pricing legislation in India and taxpayers as well as tax consultants were not fully conversant with this new branch of law when proceedings were initiated or even at appellate stag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under: "Mr. Brijlal Gupta appearing for the Department pointed out that the assessee itself filed separate returns for the two parts of a single accounting period. The assessee applied for registration for the first period only. The assessment for the second period proceeded as against an unregistered firm. It was, therefore, urged by Mr. Gupta that it is not open to the assessee to urge now that a single assessment under s. 26(1) ought to have been made. Now, there cannot be an estoppel against statute. If in fact the procedure adopted by the ITO was incorrect, the defect is not cured by the attitude taken up by the assessee." 33. In the case of CIT vs. C. Parakh & Co. (India) Ltd. (1956) 29 ITR 661 (SC), their Lordships of Supreme Court made the following observations: "On the question of the admissibility of the deduction of ₹ 1,23,719, the contention of the appellant is that as the respondent had itself split up the commission of ₹ 3,12,699 paid to the managing agents, and appropriated ₹ 1,23,719 thereof to the profits earned at Karachi and had debited the same with it, it was not entitled to go back upon it, and claim the amount as a ded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owing that their transfer pricing is consistent with the arm's length principle regardless of where the burden of proof lies." 36. The aforesaid decisions and guidelines may not be exactly on identical facts before us but they emphatically show that taxpayer is not estopped from pointing out a mistake in the assessment though such mistake is the result of evidence adduced by the taxpayer. 37. When substantial justice and technical considerations are pitted against each other, the cause of substantial justice deserves to be preferred, for the other side cannot claim to have a vested right in injustice being done due to some mistakes on its part." 4.5. This decision of the Tribunal has been further upheld by the Hon'ble High Court of Punjab and Haryana as reported in (2011) 244 CTR 542. 4.6. Relying on the decision of the Tribunal and in the interest of the substantial justice, the issue raised by way of the additional ground deserves to be admitted. Accordingly, the additional ground was admitted and the parties were directed to address on the additional grounds along with the grounds raised in appeals. 5. The ground No. 1 of the appeal of the assessee is ge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services 31,134,838 3. Provision of back office based IT enabled services 46,184,808 6.2. Further, the assessee selected 12 comparables for the support service for computer based testing and marketing support service segment and in view of the average margin of those comparables based on multiple year data, was worked out at 7.90%. The assessee's margin being higher in both segments, the transactions were treated as at arm's-length. Similarly, in the case of ITeS, seven comparables were chosen by the assessee and their mean margin was worked out at 10.04%, and thus, the transaction was considered at arm's-length. 6.3. The learned TPO though accepted the method adopted by the assessee to benchmark the international transaction, however he rejected the comparability analysis and conducted a fresh benchmarking study on the basis of additional/modified quantitative filters. The Learned TPO rejected few comparables of the assessee and selected few comparables himself. The summary of the comparable companies selected by the Learned TPO are as follows: Segment No. of Comparables Arm's Length Margin Margin of the Appellant Quantum of Addition (in INR) Mark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rejected three comparables for MSS segment and 4 comparables in ITeS segment. The summary of the comparable companies finally selected by the Ld. CIT(A) is as follows: Segment No. of Comparables Arm's Length Margin single year data Margin of the Appellant Quantum of Addition (in INR) Marketing Support Service Segment 8 10.54% 7.00% NIL Support Services for Computer based Testing Segment 8.79% NIL IT enabled Services Segment 5 20.23% 7.00% 5,710,514 6.9. In grounds along with additional grounds raised, the assessee is contesting inclusion of two comparables in the ITeS segment and one comparable in marketing and support service (MSS) segment. The assessee is also asking for computation of correct margin of one comparable. The Revenue on the other hand is seeking exclusion of the three comparables in the MSS segment and four comparables in ITeS segment. 6.10. We have heard both the parties through Video Conferencing facility and perused the paper books filed electronically. ITA No. 499/Del./2015 (Assessee's Appeal) 7. We first take up the issues raised by the assessee in its appeal. In additional ground No. 1 the assessee has sought ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total cost in the case of the company presented by the assessee. 7.3. We have heard rival submission of the parties and perused the relevant material on record. This company was included by the assessee in its set of the comparables filed before the Learned TPO and the Ld. TPO also accepted this company as valid comparable. Now, the assessee is seeking exclusion of the company on the ground of functional dissimilarity and different business model. 7.4. On perusal of page 376 of the paper-book of the annual reports, which is director's report of the company, wherein under the head review performance and business prospectus, the activity of the translation has been categorized as ITeS activity. No further detail as how the transaction services falls under ITeS category is given in the Annual Report. The process of service delivery is also not mentioned in the Annual Report. Further, the Learned DR submitted that CBDT has considered translation activity as part of ITeS activity. In view of the doubts raised by the assessee on the ITeS nature of the translation services performed by the company and no further details available in the Annual Report, needs verification from the com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le M/s. R Systems International Ltd. under the ITeS segment. 8.1. The Learned Counsel of the assessee submitted that corrected margin of the company should be considered for computation of the arm's-length margin. He submitted that the company follows year ending, which is different from the assessee. Accordingly, submitted that computation of margin might be remanded to the file of the learned TPO based on quarterly filing of the company. 8.2. On the other hand, the Learned DR relied on the margin computed by the learned TPO. 8.3. We have heard rival submission of the parties on the issue in dispute. In our opinion, in transfer pricing, comparability of the assessee has to be made with other companies in identical environment. Therefore, same financial period of both the assessee and the comparable should be considered for comparison. In view of the above facts and circumstances, we direct the learned TPO to compute the margin of this company after taking into consideration the financial results of four quarters, which have been considered in the case of the assessee. The relevant ground of the appeal ground is accordingly allowed for statistical purposes. 9. In regular gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee challenged inclusion of the company "Vishal Information Technology Ltd." on the ground of outsourcing model. The learned TPO rejected this ground following the finding of the Tribunal in the case of Deloitte Consultant Private Limited (supra). Before the Learned CIT(A) this ground was not taken and only the company was challenged on the ground of functional dissimilarity, which was rejected by the Learned CIT(A). The Learned Counsel of the assessee has referred to Schedule 14A of financial statement (page 401 of the paper-book of Annual Reports) and has submitted that vendor payment constitute 85.58% of the total cost. However, on verification of the schedule, we find that alleged vendor payments actually consist of opening stock of work in progress also and there is no separate amount of vendor payments mentioned specifically in financial statements. From the other parts of the annual report also we are unable to decipher whether the company work mainly on outsource model. In the facts and circumstances of the case, we feel it appropriate to restore this issue to the file of the Learned AO/TPO to verify exercising authority under 133(6) of the Act and if it is f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chinery in the case of the assessee also constitutes 58.81% of the fixed assets. The Ld. CIT(A) upheld the finding of the learned TPO. We have perused the annual report of the company (page 20 of annual report), wherein the segment reporting on page 22 of the annual report MSS paper-book, is mentioned, which is reproduced as under for ready reference: "08. Segmental Reporting: The Company treats Analytical Charges & Consultancy Receipts as a single segment and therefore details of segments are not separately shown. The Company is a Commercial Testing House engaged in testing of various products and also offers services in the field of pollution control as allied activity. The company is managed organizationally as a unified entity with various functional heads reporting to the top management and is not organised along segments. There are, therefore, no separate segments within the Company as defined by AS-17 (Segmental Reporting) issued by the ICAI." 9.7. In our opinion, testing of products and services in the field of the pollution-control are functionally different from the providing marketing support services. For providing testing services higher technical skills a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (A), however, excluded the company on the ground of the functional dissimilarity. The company is engaged in four segments, namely, publication, energy, event management and pharmaceuticals. It was admitted by the assessee that "event management" segment was found comparable during financial year 2005-06 and 2006-07 but in the year under consideration the assessee sought exclusion on the ground of unreliability of segment information. Before us, the learned Counsel of the assessee has referred to activities carried out under event management segment (page 34 of the paper book of MSS annual report) reported in directors report (page 4 of the annual report), which reads as under: "During the year under review, the company has arrange the major events like TEXCELLENCE 2007. STEAMTECH 2007 and SYNERGY FOR ENERGY 2008. Your company has also shown very good growth in this division and earned the revenue of ₹ 169.94 lacs as against ₹ 107.11 lacs during the previous year having the improved performed of 59%. The event management activities are mainly for industry and now it is getting momentum. With the last growth and development. It is hoped to get increasing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidered the facts of the case, the submissions of the appellant and various judicial cases on the subject. Before adjudicating on the comparability of these companies with the appellant company, it is necessary to have an overview of the functions of the two companies: RITES Ltd. provides pre-project planning services in the fields of engineering design, construction and project management for railway tracks and electrification together with traffic and software consultancy assignments to Malaysian Railways. Hence the services provided by it are extremely technical in nature requiring highly qualified technical personnel. WAPCOS renders consultancy services relating to water, power and infrastructure sectors. Services offered include market intelligence, feasibility studies, planning/project formulation, field and geo-technical investigations, engineering design, contract management, quality assurance & management and human resource development. It also executes turnkey projects on a regular basis. RITES Ltd. and WAPCOS LTD cannot be considered as a comparable for the following reasons: (i) Whereas the appellant was engaged in providing marketing and support services to its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the other hand, Learned Counsel of the assessee relied on the finding of the Learned CIT(A) and submitted that company operates into segments i.e. ITeS and software development, and therefore it cannot be compared with the assessee at entity level. 12.3. We have heard rival submission of the parties on the issue-in-dispute and perused the order of the lower authorities. We find that before the learned TPO, the assessee sought to exclude the company on the ground of multiple segments and extraordinary event. The contention of the assessee was rejected by the learned TPO. The learned TPO noted that the company shown revenue from ITeS as well as software development and implementation but the revenue from ITes was 80.87% therefore it was selected as comparable. The objection of extraordinary event was also rejected on the ground that the assessee did not adduce any evidence of impact of the extraordinary event on the margin of the company. The learned CIT(A), however, rejected the findings of the learned TPO and excluded the company. The finding of the Ld. CIT(A) on the issue in dispute is reproduced as under: "(c) (I) I have considered the facts of the case, the submissions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the learned TPO, in view of TNMM selected as most appropriate method, only broad similarity of function was required. The learned TPO also rejected objection of the assessee of extraordinary event during the year under consideration and intangibles owned by the company. The Learned CIT(A) excluded the company from the set of comparables, observing as under: "c) I have considered the facts of the case, the submissions of the appellant and various judicial pronouncements on the issue. The TPO erred in including E Clerx Services Ltd. as a comparable on account of the following reasons: • E Clerx Services Ltd. offers solutions that include data analytics, operations management, audits and reconciliation and therefore has to be classified as high end KPO. • Extra ordinary events and peculiar circumstances prevailed in the case of this company as it acquired a UK based company which has significantly contributed to the increase in the customer and revenue base of the company. • The Hon'ble Bangalore Tribunal in the case of Capital IQ Information Systems India (P.) Ltd. (supra) had an occasion to deal with comparability of this company in the case of an I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lower authorities. The Ld. CIT(A) has excluded the company on the ground of related party transactions being more than 25% of the sales. The relevant finding of the Ld. CIT(A) is reproduced as under: "(c) I have considered the submissions of the appellant and gone through the facts of this case. The appellant is challenging the inclusion of this comparable on two fronts, firstly the massive disparity in turnover of the appellant company on the one hand and HCL on the other and RPT being more than 25% in the case of the comparable company. As regards the latter, the TPO had chosen RPT transactions greater than 25% as a filter for selecting the final list of comparables. Once RPT in excess of 25% was adopted by the TPO as a filter, no comparable failing to satisfy this filter should have been included. Besides there are a number of case laws where comparables having RPT in excess of 25% have been excluded. (ADP(P) Ltd. Vs DCIT (2011) 10 taxmann.com 160) (Kyd-Trib); Global Logic India(P) Ltd. Vs DCIT (2011) 12 taxmann.com 2S5 (Del-Trib) ACIT Vs Hapag Lloyd Global Services(P) Ltd. (ITA No. 8499 dated 28-2-13).In light of this discussion if RPT is in excess of 25% this comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the issue in dispute and also relied on following decisions: • M/s. Symphony Marketing Solutions India Private Limited V/s ITO (IT (PA) No. 1316/Bang/2012)- AY 2008-09 • M/s. BA Continuum India Private Limited V/s ACIT (ITA No. 1144/Hyd/2014)- AY 2008-09 • ICC India Private Limited V/s DCIT (ITA No. 25/Del/2012)- AY 2007-08 • M/s. Capital IQ Information Systems (India) Pvt. Ltd. (ITA No. 1961/Hyd/2011; AY 2007-08 Paragraph 12, 13 and 23, Page 17 and 25) wherein, the Hon'ble ITAT relied upon DRP directions for subsequent year, i.e. AY 2008-09 in assessee's own case based on similar facts of the case in both the years. • Zavata India Private Limited [ITA No. 1781/Hyd/2011; AY 2007-08; Paragraph 31- Page 15".In this case, the Hon'ble ITAT followed the order of Capital IQ Information Systems wherein, the Hon'ble ITAT had relied upon DRP directions for subsequent year, i.e. AY 2008-09 in assessee's own case based on similar facts of the case in both the years. • M/s. Avineon India Pvt. Ltd. ITA No. 1989/Hyd/2011; AY 2008-09; Paragraph D (3), Page 15;. 15.2. We have heard rival submission of the parties on the issue i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he impugned order of the id. CIT(A) on this issue and restore the matter to the file of the A.O. with a direction to decide the same afresh after taking into consideration the submissions made by the assessee before the learned CIT(A) and keeping in view the Delhi Bench of ITA in the case of Abode Systems India Pvt. Ltd. (supra). In this view of the matter, we accept the contentions of the assessee that this company cannot be treated as a comparable." (iii). From the next year, as per the appellant, the TPO also did not include Mold-Tech as a comparable. (iv). Mold Tech in its Audit Report for FY 2010-11 made a disclosure that since it was coming out of tax free zone in FY 2011-12, certain adjustments were made in its books for 2010-11 in relation to amounts pertaining to preceding years. This means that for years prior to FY 2010- 11, the accounts of the company were not reflecting the true margins and thus profits. Hence on the basis of these arguments together with various case laws on this issue, I hold that the AO erred in including Mold Tech as a comparable." 15.3. In view of judicial precedent, the Ld. CIT(A) is justified in excluding the company because o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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