TMI Blog2013 (3) TMI 415X X X X Extracts X X X X X X X X Extracts X X X X ..... be determined whether the two existing units were merged and consolidated to bring into existence a new unit and thereby a new unit has been set up by restructuring of the existing unit during the year under consideration - the matter is remanded to the records of the AO for examination, verification and then decide the issue as per law. Technical fee and satellite link charges excluded from export turnover - Held that:- After considering the facts of the case and the principles established by the Coordinate bench in the case of Patni Telecommunication (P) Ltd. v. ITO [2008 (1) TMI 452 - ITAT HYDERABAD-A] it is held that the expenses on satellite link charges does not come within the scope of 'telecommunication charges' as provided in clause (iv) of Explanation 2 to section 10A and accordingly, the A.O. is directed not to exclude the same from export turnover A.O. is directed to recalculate the deduction under section 10A -in favour of assessee. Selection of comparables – TP Adjustment - Assessee company was providing Information Technology Enabled Services (ITES) to overseas affiliates/Associated Enterprises aggrieved by transfer pricing adjustments made by TPO who had acce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entity having more than 10% of the related party transaction should be excluded because the comparable should be an uncontrolled transaction and therefore, so far as it is possible, its result should not be influenced by related party transaction. In the normal circumstances, where a good number of comparables are available, then the limit of related party transactions should be 15% of the total revenue. In a extreme case where only one or few comparables are available, then an entity having related party transactions not exceeding 25% of the total revenue can be considered so that the ALP should be determined having comparison broad based, though this extreme limit of 25% can be considered only in exceptional cases. Where the comparable is operating in two or more segments, the above tolerable percentages to be applied to transactions in relevant segment (assessee's segment-ITES segment in this case). TPO has found sufficient number of comparables and finally took 30 companies as comparables; therefore, this case does not fall under the category of exceptional cases where criteria of related party transactions can be relaxed more than 15% of the total revenue of the entity. Hen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e not satisfied. 1.3 The learned CIT(A) erred in confirming that the appellant company has not computed the deduction under section 10A of the Act in accordance with the provisions of sub-section (4) of section 10A of the Act. 1.4 The learned CIT(A) erred in not providing an opportunity to the appellant company before disallowing the deduction under the provisions of section 10A(2)(ii) and 10A(2)(iii) of the Act. 1.5 The appellant prays that the Hon'ble ITAT direct the learned Assessing Officer to delete the disallowance under section 10A of the Act. 2. Deduction of Technical Fees and Satellite Link Charges from Export Turnover 2.1 The learned CIT(A) erred in contending that this ground is inconsequential once the appellant company is held not eligible for the said deduction. 2.2 The appellant prays that the learned Assessing Officer be directed not to exclude satellite charges, technical fees, interest earned on bank deposit and miscellaneous income from export turnover for the purpose of computing deduction under section 10A of the Act. 3. Transfer Pricing Adjustment 3.1 The learned CIT(A) erred in up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d CIT(A) erred in law and facts in disregarding the comparability factors specified under Rule 10B(2) of the Income-tax Rules, 1962 ['the Rules'] and the provisions contained in Rule 10B(3) of the Rules which specifies that an adjustment should be made to account for differences between the transactions that may materially affect the price of such transactions. The learned CIT(A) erred in not considering the additional evidence relating to the grant of working capital adjustment on the margin of the comparable companies proposed by the TPO and which was granted to the appellant by the TPO in AY 2006-07. The learned CIT(A) erred in disregarding the differences in risk profile of the appellant (being a captive service provider) and the alleged comparable companies selected by TPO, by not allowing the risk adjustment made by the appellant. 3.7 The learned CIT(A) erred in not appreciating the fact that the margin earned by the appellant is reflective of the services rendered by a contract service provider. 3.8 The learned CIT(A) erred in confirming the selection of final comparable companies, selected by the TPO, witho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation and expenses incurred in foreign exchange in providing the technical services outside India are to be excluded from the export turnover; but the same shall form part of the total turnover for the purpose of computation of deduction u/s 10A. Since the exclusion of technical service fee, satellite link charges, is an issue to be dealt with in ground No.2 raised by the assessee; therefore, ground No.1 is only with respect to the disallowance of deduction u/s 10A. 3.2 The CIT(A) held that the assessee does not fulfil all the conditions laid down u/s 10A(2) of the Act. Further, even the computation of so called eligible profit done by the assessee is not as per the provisions of sec. 10A(4). The CIT(A), apart from confirming the action of the Assessing Officer that the computation of the eligible profit by the assessee, is not as per the provisions of sec. 10A(4) has also held that the assessee has consolidated its SEEPZ unit at Andheri and its existing Vikroli unit. Such consolidation of existing unit would bring into existence of a consolidated unit and as such, the consolidated unit has come into existence, as a result of restructuring of business already in existence; thereb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to decide whether SEEPZ was setup/formed by splitting up the first unit when the relief for the first assessment year has not been withdrawn, the ITO cannot withdraw the relief granted for the subsequent years. Thus, the ld. Sr. counsel has submitted that when the claim of the assessee was accepted for the AY 2000-01 onwards till AY 2005-06, then the Assessing Officer cannot withdraws the deduction in the subsequent years. 4.3 On the other hand, the ld. DR has submitted that the unit at SEEZP (Andheri) had been consolidated with Vikroli unit and there are no separate books of account maintained by the assessee for both the units after such consolidation; therefore, the deduction u/s 10A cannot be allowed to such a consolidated unit as there is no concept of highbird on the basis of which, a part of the unit can be considered as eligible and other part would be considered as not eligible. Thus, the entire claim of the assessee is liable to be rejected as held by the CIT(A). She has pointed out that the ld. CIT(A) has found that the undertaking has been formed by the assessee by restructuring of the business already in existence and therefore, the deduction u/s 10A is not available ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r years without any dispute. Provisions of section 10A(4) are as under: 10A(4): For the purposes of [sub-sections (1) and (1A)], the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking". 9.1 As can be seen, it is only a method provided for arriving at the profits derived from export of articles or things of computer software and assessee has followed head count method for arriving at the export turnover and expenditure for the Vikroli unit in the absence of separate books of account. This is one of the methodologies adopted in arriving at the export turnover and the profits so as to work out the profits of the Units. 9.2 Similar issue was considered by the Hon'ble Delhi High Court in the case of Commissioner of Income-tax v. EHPT India (P.) Ltd. 16 taxmann.com, 305 (Del.) = (2011-TIOL-839-HC-DEL-IT) wherein the facts are that the assessee was operating two units, one software Techno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uthorities. That it is a reasonable method and fair to both sides is indicated by the conduct of the revenue authorities in accepting it in the past. The reasonableness or fairness of the method of head-count adopted by the assessee can be said to be indicated by the fact that in the assessment year 2002-03 the assessee apportioned more common expenses to the STP unit, thereby reducing its profits and consequently reducing the claim for deduction under section 10A and at the same time offering a higher income in the domestic unit than what would have been offered had the turnover method of apportionment adopted by the Assessing Officer been followed.It was only as a matter of principle that the Commissioner (Appeals) upheld the method adopted by the Assessing Officer even though the result was in favour of the assessee. Neither the Assessing Officer nor the Commissioner (Appeals) has raised any serious questions about the validity of the head-count method adopted by the assessee nor have they pointed out any commercial accounting principle or accounting standard that repudiates the method. [Para 8] Section 10A provides for deduction for profits derived from the export of software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t are profits derived from the export of the eligible items. It has to be read with sub-section (1). It says that the export profits have to be apportioned on the basis of the ratio which the export turnover bears to the total turnover of all the businesses of the eligible undertaking. The instant case is not concerned with sub-section (4). That sub-section will apply when the combined profits - profits of the exempt unit and those of the non-exempt unit - have been ascertained; the next step will be to apportion them on the basis of the ratio which the export turnover bears to the total turnover. Instant case is concerned with the stage before that. Instant case is concerned with the method by which the indirect or common expenses - expenses which are incurred for both the exempt and taxable units - are to be apportioned between the two units. To apply the formula prescribed in sub-section (4) may be appropriate in a given case considering its peculiar facts. But applying the same formula to all cases of apportionment without having regard to the history of assessments and other relevant factors may not be justified. In a case where alternative methods of apportionment of the ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses of the units and accordingly, set aside the issue to examine the quantum of deduction after examination of the actual apportionment and profit of the units eligible for deduction u/s 10A and non-eligible unit respectively. 5.3 The CIT(A) has added one more reason for disallowance of the deduction u/s 10A that the assessee does not fulfil the condition as laid down u/s 10A(2) of the IT Act because the assessee has consolidated two existing units into one and thereby a consolidated unit came into existence by reconstruction of the already existing unit. Thus, the CIT(A) has made out a case that two existing units; one eligible for deduction u/s 10A; and another non-eligible unit were consolidated and by virtue of this consolidation, the new consolidated unit came into existence by reconstruction of the existing unit. Hence, it violates the conditions as prescribed under 10A(2)(ii) (iii) of the Act. 5.4 There is no dispute on the legal proposition on the issue of denial of the deduction, if the deduction was allowed in the first year, then for the subsequent Assessment Year, the Assessing Officer cannot disallow the claim of the assessee without disturbing the order of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Information Pvt. Ltd. (supra) merits acceptance. Therefore, in this case, it is not necessary for us to decide whether SEEPZ unit was set up/formed by splitting up of the first unit. In both the above decisions, this Court has held that where a benefit of deduction is available for a particular number of years on satisfaction of certain conditions under the provisions of the Income Tax Act, then unless relief granted for the first assessment year in which the claim was made and accepted is withdrawn or set aside, the Income Tax officer cannot withdraw the relief for subsequent years. More particularly so, when the revenue has not even suggested that there was any change in the facts warranting a different view for subsequent years. In this case for the assessment years 2000-01 and 2001-02 the relief granted under Section 10A of the Act to SEEPZ unit has not been withdrawn. There is no change in the facts which were in existence during the assessment year 2000-01 vis-a-vis the claim to exemption under section 10A of the Act. Therefore, it is not open to the department to deny the benefit of Section 10A for subsequent assessment years i.e. assessment years 2002-03 and 2003-04 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... technical fee and satellite link charges excluded from export turnover. 8.2 Though the Assessing Officer denied the claim of deduction u/s 10A; however, alternatively, the Assessing Officer has also reduced the satellite link charges of Rs. 50,00,615/- and technical service fee of Rs. 1,03,01,183 from export turnover while computing the deduction u/s 10A. The CIT(A) has held that once the issue of deduction u/s 10A has been decided against the assessee, then this ground of appeal has become consequential. 9. We have heard the ld. Sr. counsel for the assessee as well as the ld. DR and considered the relevant material on record. At the outset, we note that this issue has been considered and decided by this Tribunal in assessee's own case for the AY 2006-07 in paras 10 to 11.2 as under: "10. Ground no.2 is on the issue of reduction of technical fees and satellite link charges from export turnover. Assessing Officer while rejecting the entire claim of section 10A however alternatively also reduced the technical fees and satellite link charges of Rs. 1,73,59,069and Rs. 2,02,10,562 respectively from export turnover for the purpose of computing the deduction under section 10A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment year 2004-05 which the Revenue accepted, the CIT(A) in assessment year 2005-06 also deleted the same. Even in AY 2005-06 there is no appeal by the Revenue to ITAT. Therefore, since the issue was already held in favour of assessee on facts, we are of the opinion that the principles of judicial consistency require that AO should not have excluded the amount from the export turnover. The DRP also was not correct in rejecting the issue. In view of this, we allow the ground raised by assessee on this issue of expenses for 'technical services'. 11.1 The other amount involved in Ground No. 2 is with reference to the 'satellite expenses'. AO excluded this amount also to arrive at the export turnover as defined under section 10A(4). After considering the submissions in assessment year 2004-05, the ITAT in ITA No.4329/Mum/08 2010-TIOL-576-ITAT-MUM held in favour of assessee as under: "7. However, while completing the assessment the A.O. treated the above satellite link charges as part of telecommunication charges. This issue was discussed elaborately by the Coordinate Bench in the case of Patni Telecom (P.) Ltd. v. ITO (wherein one of us, the J.M. was a member) 22 SOT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... attributable to delivery of goods outside India, such expenses are not required to be deducted from the consideration. Normally, in a transaction of purchase and sale, there are two types of conditions between the parties. One is where price quoted of goods is inclusive of all expenses or in other words price quoted is only in respect of goods. Another condition is where price of goods and charges of expenses are separately stated. In a case where such expenses are to be separately charged, invoices are prepared showing value of the goods and such expenses. If the quoted price is inclusive of such expenses, then consolidated value of the goods is only mentioned in the invoice. In a case where only value of goods is quoted, expense is borne by the supplier. In cases where expenses have not been separately charged, the convertible foreign exchange received is consideration of the goods only. Where such expenses are separately charged in the invoices, the consideration received in convertible foreign exchange includes the value of the goods and such expenses. If the consideration received is only against the goods, then there is no need to deduct such expenses from the consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of 'export turnover', then on the same assumption, reason and analogy it should be excluded from 'total turnover'. Therefore, the Assessing Officer was not correct in excluding ISP expenses from consideration received in convertible foreign exchange while calculating export turnover for the purpose of section 10." 8. The ISP expenses considered in the above said decision are similar to the satellite link charges paid by the assessee. As seen from the bills placed on record before the authorities the assessee has paid satellite link charges to VSNL, MTNL and also to Software Technology Park India (STPI) towards bi-monthly half circuit charges/international half circuit charges and rent for TMI - Frame Relay CCT charges including port charges. The port charges, however, were calculated on the basis of USD per annum basis where as rest of the charges were paid on annual lease agreement periodically and these are fixed charges not connected with the delivery attributable to the export of goods. Even though the assessee has utilized the satellite link for receiving data and also for transferring data this cannot be considered as telecommunication charges for delivery of goods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the order of the ITAT in assessment year 2004-05, we hold that the satellite charges cannot be considered as 'telecommunication charges' so as to exclude from the export turnover. We accordingly uphold assessee's grievance on this issue. Ground No.2 is allowed." 9.1 Following the earlier order of this Tribunal, we decide this issue in favour of the assessee and against the revenue. 10. Ground no.3 is regarding transfer pricing adjustment in respect of services rendered by the assessee to its Associated Enterprise (AE). 10.1 The assessee is providing/rendering information Technology enabled Services (ITES) to its overseas affiliates/AEs namely Tyrinty Processing Services Ltd. (TPSL), UK and Willis Processing Services Inc., USA. ITES provided by the assessee to its AE includes; (i) processing of insurance claims, premiums, and treaties; (ii) Accounting for insurance underwriters and clients; (iii) Insurance accounting support services; and (iv) data processing. 10.2 The assessee furnished Transfer Pricing report in support of the arm's length price (ALP) of 10.54% by adopting TNMM as the most appropriate method and using PLI as operating profit to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... data. The TPO was of the view that the 8 companies provided in the TP study are not adequate and reasonable number of comparables and accordingly for broad level of comparability allowed under TNMM a fresh search was carried out by the TPO. Consequently the TPO selected a set of 25 comparables of ITES purported to have been performed functions broadly comparable to the activity of the assessee related to ITES as under: S. No. Name of the Comparable Company PLI (%) 1. Accentia Technologies Ltd. 38.26 2. Aditya Birla Minacs Worldwide Ltd. (Earlier Transworks Information Services Ltd. 11.98 3. Allsec Technologies Ltd. 27.31 4. Apex Knowledge Solutions Pvt. Ltd. 12.83 5. Appollo Healthstreet Ltd. -13.55 6. Asit C. Mehta Financial Services Ltd. 24.21 7. Bodhtree Consulting Ltd. (Seg.) 29.58 8. Caliber Point Business Solutions Ltd. 21.26 9. Cosmic Global Ltd. 12.40 10. Datamatics Financial Services Ltd. (Seg.) 5.07 11. Eclerx Service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rded in the order that the assessee has been provided all the information regarding financial information of 25 comparables companies including the companies whose financial information are not available in the public domain. 10.11 After rejecting the objections of the assessee, the TPO determined the ALP of international transactions by applying arithmetic mean of total 30 comparables, 8 by the assessee and 22 new added by the TPO at 28.47% as under: S. No. Name of the Comparable Co. PLI(%) Remark 1. Accentia Technologies Ltd. 38.26 Department 2. Aditya Birla Minacs Worldwide Ltd. (Earlier Transworks Information Ser Ltd.) 11.98 Common 3. Allied Digital Services Ltd. 26.3 Assessee 4. Allsec Technologies Ltd. 27.31 Department 5. Apex Knowledge Solutions P. Ltd. 12.83 Department 6. Appollo Healthstreet Ltd. 13.55 Department 7. Asit C Mehta Fin Services Ltd. 24.21 Department 8. Ask Me Info. Hubs Ltd. 0.3 Assessee 9. Bod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has submitted that there was no requirement of any fresh search for selecting the other comparables once the TPO accepted the 8 comparables selected by the assessee which are more than sufficient for determination of the ALP. In support of his contention, the ld. Sr. counsel has relied upon the decision of the Delhi Benches of the Tribunal in the case of Haworth India P. Ltd. in ITA No.5341/Del/2010 = (2011-TII-64-ITAT-DEL-TP) as well as decision in the case of Vedaris Technology P. Ltd. in ITA No.4372/Del/2009 = (2010-TII-10-ITAT-DEL-TP)wherein the Tribunal has opined that under TNMM even one comparable was adequate to determine the ALP. 13.1 On the other hand, the ld. DR has submitted that the facts in the case of Haworth India P Ltd. (supra) as well as in the case of Vedaris Technology P. Ltd. (supra) are totally different to that of the assessee's case and therefore, these decisions of the Tribunal are not applicable in the facts of the present case where more comparables were available. He has relied upon the decision of the Special Bench of this Tribunal in the case of Aztec Software and Technology Services Ltd. v. Assistant Commissioner of Income-tax reported in 294 ITR 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e cannot be a fixed number of comparables to be considered as sufficient or appropriate number for determination of the ALP as a general parameter. The sufficient number of comparables depends upon the facts and circumstances of the each case and there cannot be a fixed criteria or parameter for number of comparables, which can be universally applied to each and every case for determination of the ALP. It is an accepted rule of sampling that larger size of sample would better and adequate represent the lot or population to which the sample belongs. Therefore, to get an adequate result and better representation, the size of sample must be large enough. The same rule is applicable in the case of number of comparables selected for representing the true and correct ALP in relation to the international transaction. The endeavour should be made to bring more and more comparables so that a proper and realistic price can be determined which represents the price prevailing in the open market. 14.4 Under the Transfer Pricing Regulations, the number of comparables may be one or more than one; but there is no upper limit prescribed u/s 92C of the I T Act. However, the first proviso to se.92( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken into consideration as there is no valid reason to do so." 14.6 The finding of the Tribunal is on the point whether in a case where only comparable is left which is selected by the assessee in the TP study, then the TPO is not bound to carry out a fresh search. Therefore, the Tribunal's decision is not on the point of restricting the power and jurisdiction of the TPO to carry out the fresh search; but it is in the peculiar facts of the said case when only one comparable was left and in view of the TPO, no fresh search was required, then the ALP can be determined on the basis of one comparable. Therefore, the said finding of the Tribunal cannot be understood and inferred as a bar on the jurisdiction of the TPO to carry out a fresh search. 14.7 In the case of Vedaris Technology (P.) Ltd. (supra) also, the Tribunal has observed that when both the parties have accepted the sole comparable left, then it is to be a valid comparable case. Again the finding of the Tribunal is not on the point of jurisdiction of the TPO; but is on the point when one comparable which is left and accepted by both the parties and the TPO chose not to carry out a fresh search, then the ALP can be dete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal dealt with the objection against Accentia Technologies Ltd. on the ground of marking expenditure and not on account of extra ordinary events because no such objection was raised by the assessee in the said case. 18. We have considered the rival submissions and carefully perused the relevant material on record. The assessee has raised the objection against this company because of the alleged merger/amalgamation. It is to be noted that in the case of Actis Advisors Pvt. Ltd. (supra), the Delhi Benches of this Tribunal has dealt with the objection raised by the assessee on the ground that the company incurred advertisement and marketing expenses more than 3% and hence should not be considered as comparable because they are functionally different from the assessee who had incurred less than 3% of the sale in the area of marking and advertisement expenditure. 18.1 Thus, it is clear from the finding recorded by the Delhi Benches of the Tribunal that the objections regarding extra ordinary events like merger and de-merger neither raised nor considered in the said decision. However, as far as the functional similarity and other objections raised by the assessee in the said case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wing decisions: (i) Avaya India P. Ltd. - ITA No. 5150/Del/2010 = (2011-TII-139-ITAT-DEL-TP) (ii) Sony India P. Ltd. - ITA No. 1731/Del/09 = (2009-TII-09-ITAT-DEL-TP) (iii) Philips Software Services Ltd. - ITA No.218/BNG/08 = (2008-TII-09-ITAT-BANG-TP) (iv) CRM Services India P. Ltd. - ITA No.4068/Del/2009 = (2011-TII-86-ITAT-DEL-TP) (v) Bentton India P. Ltd. - ITA No.3829/Del/2010 = (2012-TII-05-ITAT-DEL-TP) 20.1 Thus, the ld. AR has submitted that the Tribunal in the above mentioned decisions has held that 10 to 15% of the related party transactions should be considered as threshold for considering an entity as comparable. He has pointed out that in some of the cases like Sony India P. Ltd., Philips Software, the Tribunal has held that the comparables having related party transactions of even Rs. 1/- should be excluded. 20.2 On the other hand, the ld. DR has contended that 25% of the related party transactions be considered as threshold. In support of his contention, he has relied upon the decision of the Delhi Benches of the Tribunal in the case of Actis Advisors Pvt. Ltd. (supra). The ld. DR has referred sec 92A of the Act and submitted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee's case and it was mandatory on the part of the TPO to use data relating to financial year 2002-03 in which the international transactions were admittedly enter into by the assessee with its associate enterprises. Therefore, the second filter is also upheld." 21.2 The Tribunal has upheld the decision of the authorities below in applying filter for rejection of Comparable Company having related party transaction more than 15% of the total sales. Similarly in the case of Sony India P. Ltd. (supra), the Tribunal has dealt with an identical issue in para 115.3 asunder: "115.3 On careful consideration of rival submissions, we see no justification for excluding above named three entities from the list of comparable for working out mean operating profit. It is an admitted position that these companies satisfy screening criteria (filters) adopted by the Transfer Pricing Officer at page 10 of the order except his observation that companies were having controlled transactions with related parties. The TPO and on appeal, the learned CIT (Appeals) did not substantiate the allegation by furnishing figures of controlled transactions to show that such transaction had signific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as held that an entity can be taken as uncontrolled, if its related party transaction do not exceed 25% of the total revenue. This view of the Tribunal is based upon the criteria enumerated u/s 92A(2) of the IT Act wherein expression of associate Enterprises has been defined, if certain conditions and criteria as provided thereunder are satisfied. One of the criteria is if an entity holds 26% shares in another entity, then it can be considered as AE. Thus it is clear that the Benches of Tribunal have taken divergent view in various decisions and held that an entity can be taken as uncontrolled, if its related party transaction ranging from 0 to 25% of the total revenue. In the majority of the cases, the range of related party transaction has been considered between 10 to 15% of the total revenue. It is discernible from the different views taken by the Tribunal in these decisions that there cannot be a fixed criteria/parameter which can be applied as a filter in respect of related party transactions for considering an entity as uncontrolled for the purpose of determination of the ALP. 21.8 In our view 0% related party transaction is an impossible situation and therefore, it is pra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e entity. Hence, we are of the considered opinion that in the case in hand, when there is no shortage of comparables, an entity can be considered as uncontrolled, if the related party transaction do not exceed 15% of the total revenue. 21.12 Having applied this criteria, we find that the company Allsec Technologies Ltd. having related party transactions constituting 17.77% of the total revenue would be excluded from the comparables on this ground alone. The ld. DR has pointed out that the percentage of related party transaction as given in the financial record of the company is in respect of the total business revenue and segment wise results from ITES segments are not available. Therefore, it cannot be said that whether related party transactions constituting 17.77% of the total revenue is proportionally equal in respect of the revenue from ITES segments. It is to be noted that the TPO has not taken segment results of this company; but margin and results are taken on the entity level; therefore, having more than 15% of the revenue from related party, this company deserves to be excluded from the comparable. (v) Apex Knowledge Solutions P. Ltd.: 22. The ld. AR has submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat as per Schedule-8 of the financial account, out of total income of Rs 63,415, income from ITES is Rs.60,908/- which is 96% of the total revenue. He has further submitted that there are segment results available which may be adopted for ITES margins. 27. We have considered the rival submissions and carefully perused the relevant material on record. Though, the TPO has taken the entity level results in the case of this comparable; however, the ld. DR has brought the details, which show that the income from ITES is about 96% of the total revenue. Therefore, as far as the functional comparability of this company is concerned, we find that this company is functionally comparable with the assessee. 27.1 Moreover, when segment results are available, then the same can be taken into consideration for the purpose of determination of the ALP. 27.2 As regards the related party transactions are concerned, since the related party transactions are in respect of the total business and it is not clear as how much percentage of the related party transactions is in the ITES segment. Therefore, this matter is required verification and examination on the facts as brought before us by the ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om it had developed the software application. It is also made it clear in that letter that the said service is one of the sources which comes under the category of ITES which constitutes majority part of the data cleaning services. As per Annexure 2 of this letter, the said company received the revenue to the extent of 2.94 crores in respect of data cleaning services. The ld. AR of the assessee has objected the contention of the ld. DR that this company is in the ITES, which amounts to improving upon the order of the TPO. 30.1 However, we do not agree with the objection of the ld. AR because the stand of the ld. DR is not opposite to the order of the TPO; but this additional argument is in support of the order of the TPO for considering this company as a comparable. Since this information has been brought before us for the first time; therefore, we set aside this issue of comparability of this company to the record of the Assessing Officer/TPO for verification, examination of the complete information properly and then decide the issue after considering the objections of the assessee against this company. (x) Caliber Point Business Solutions Ltd: (xi) Cosmic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the segmental results of this company. Hence, the objection raised by the ld. AR cannot be accepted. (xiii) Eclerx Services Ltd. 34. The ld. AR has submitted that this company cannot be considered as comparable because of having super normal profit and Knowledge Processing outsourcing (KPO). He has filed a copy of the Annual report and speech of the Chairman to the Shareholders wherein it has been explained that this company is a data analytics KPO provider specializing in two business verticals - financial services and retail and manufacturing. This company provides solutions that do not just to reduce cost; but help the clients increase sales and reduce risk by enhancing efficiency by providing available insights that empower better decisions. It has been named as one of the 'top 20 companies to watch' by Business Today. This company is providing data analytics and data process solutions to some of the largest brands in the world. Thus, this company cannot be considered as comparable of the assessee. In support of his contention, the ld. AR has submitted that Hyderabad Benches of the Tribunal in chase of Capital IQ Information Systems India P. Ltd. (supra) has rejected t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - ITA NBo.1368/Bang/2010 (iii) Adobe Systems IPL - ITA No.5043/Del/2010 = (2011-TII-13-ITAT-DEL-TP) (iv) TEVA India - ITA BNo.6107/Mum/2009 = (2011-TII-28-ITAT-MUM-TP) (v) Capital IQ- ITA No.1961/Hyd/2011 = (2012-TII-148-ITAT-HYD-TP) 34.4 We have considered the rival submissions and carefully perused the relevant material on record. The factors for determining inclusion or exclusion of any case in the list of comparables are specifically provided under Rule 10B(2). Therefore, unless and until there are specific reasons and factors as provide under the Rule 10B, an entity cannot be excluded or eliminated from the list of comparables solely on the basis of high profit making unit or loss making unit because no such factor finds place either in Rule 10B(2) or 10B(3) of IT Rule. 34.5 Even as per OECD TP guidelines, the extreme results might consist of losses or unusually high profits itself cannot be a factor for potential comparables; but further examination would be needed to understand the reasons for such extreme results. If some reasons are detected which indicate a defect in the comparability or exceptional conditions for such an extreme results, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit making unit cannot be eliminated from the comparables unless, there are specific reasons for eliminating the same which is other than the general reason that a comparable has incurred loss or has made abnormal profits. Thus, this ground is dismissed. 34.7 Similarly in the case of M/s B P India Services P. Ltd. (supra) the coordinate Benches of this Tribunal has adjudicated this issue in para 1.2.6 as under: "12.6. Thus it is evident that the decisive factors for determining inclusion or exclusion of any case in/from the list of comparables are the specific characteristics of services provided, assets employed, risks assumed, the contractual terms and conditions prevailing including the geographical location and size of the markets, costs of labour and capital in the markets etc. Nowhere, the higher or lower profit rate, as presumed by the Id. CIT(A), has been prescribed as the determinative factor to make a case incomparable. Rightly so, because profit is not a factor in itself, but consequence of the effect of various factors. Only if the higher or lower profit rate results on account of the effect of factors given in rule 10B(2) read with sub-rule (3), that s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le to Telecordia would not ruled out a comparability of the company with the assessee. As regards the related party transactions, the ld. DR has relied upon the decision of the Delhi Benches of the Tribunal in the case of Actis Advisers (supra) wherein threshold limit for related party transactions was considered at 25% to the total revenue. 36. Having considered the rival submissions and relevant material on record, we find that this company is having related party transactions constituting 25% of the total revenue. This fact has not been disputed by the department; therefore, in view of our finding in the foregoing paragraphs on the issue of related party transactions, this company cannot be considered as a good comparable when the related party transactions constitutes more than 15% of the total revenue. Accordingly, this company cannot be considered as a comparable. (xv) Genesys International Corporation Ltd. 37. The ld. AR of the assessee has submitted that this company was engaged in the business of software services and I T consultancy services and hence, should be rejected as a comparable. He has referred the order of the TPO and submitted that the TPO itself has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Services Ltd: 39. The ld. AR has submitted that the turnover of this company was very high as compared to the assessee; therefore, this company cannot be a good comparable because of vast difference of turnover. In support of his contention, he has relied upon the decision of the Hyderabad Benches of the Tribunal in the case of Capital IQ Information (supra) as well as the decision of the Bangalore Benches of the Tribunal in the case Trilogy E Business. Apart from this, the ld. AR has also submitted that this company had related party transactions constituting 21.52% of the total turnover; therefore, this company cannot be considered as a comparable. 39.1 On the other hand, the ld. DR has submitted that the turnover has no direct relation with the margin. He has submitted comparative details and chart to show that comparability of various companies having different turnover and margins and submitted that it is clear from the table as well as the graphic chart that the company having high turnover has low margin whereas low turnover has high margin. In support of his contention, he has relied upon the decision of this Tribunal in the case of M/s Symantec Software Solutions P. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ionally not comparable with the assessee because the assessee does not incurred any expenditure by way of marketing as the marketing activities are executed by parent company. He has further submitted that this company is having related party transactions constituting 14.99% of the total turnover. 44.1 On the other hand, the ld. DR has submitted that on the basis of marketing expenditure, this company cannot be excluded as a comparable. In support of his contention, he has relied upon the decision of the Delhi Benches of the Tribunal in the case Actis Advisors P. Ltd. (supra) 44.2 As regards the related party transactions, the ld. DR has submitted that the related party transactions are less than 15%. Thus, in view of the decision of the Delhi Benches of the Tribunal in the case of Actis Advisors P. Ltd. (supra) it much below the threshold limit as considered by the Tribunal at 25%. 44.3 In rebuttal, the Ld AR has submitted that high marketing expenditure resulting in brand creation and hence, this comparable should be rejected. 45. We have considered the rival submissions and carefully perused the relevant material on record. As far as related party transactions constituti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jected this contentions on the ground that such an argument is not based on any substantial analysis. The assessee made reference to WIPRO Flex Tronic Software System and submitted that these companies have created marketing intangible, therefore, they are earning more profit then any other captive entity. Learned TPO rejected the contention of the assessee on the ground that 95% of the revenue of Infosys is from repeat business. The marketing intangible did not help Infosys to get any better business according to the learned TPO. On an analysis of the learned TPO's order coupled with the contentions of the assessee, we are of the view that learned TPO has rightly observed that in the case of manufacturing or distribution companies marketing expenses over a period of time may create marketing intangible which will helpful to them for getting better business but it may not be applicable with equal force on service industries like I.T. Enabled Services. The instances of Infosys referred by the assessee has been specifically dealt with by the learned TPO, he has reproduced relevant portion of the annual report of Infosys on page 25. For buttressing this plea, learned counsel for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any was very high in comparison to the assessee. Therefore, this company cannot be considered as a good comparable. In support of his contention, he has relied upon the decision in the case of Capital IQ Information (supra) as well as the decision of the Bangalore Benches of the Tribunal in the case Trilogy E Business. 46.1 On the other hand, the ld. DR has submitted that the turnover has no direct relation with the margin. He has submitted comparative details of various companies having different turnover and submitted that it is clear from the table as well as the graphic chart that high turnover has low margin whereas low turnover has high margin. In support of his contention, he has relied upon the decision of this Tribunal in the case of M/s Symantec Software Solutions (P.) Ltd. - ITA 7894/Mum./2010. 46.2 In rebuttal, the ld. AR has submitted that in the case of Actis Advisors P. Ltd. (supra), the Tribunal has excluded this company on the ground of high turnover in para 31. He has also referred the Rule 10B(2) and submitted that the factor for comparability of an entity includes the size of markets; level of competition; assets employed for services. Therefore, the high tu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices Ltd., thereby reducing the arm's length margin to 25.6%. It is argued that the case of the assessee is not comparable with Infosys Technologies Ltd., the reason being that the later is giant in the area of development of software and it assumes all risks, leading to higher profit. On the other hand, the assessee is a captive unit of its parent company in the USA and it assumes only limited currency risk. Having considered these points, we are of the view that the case of the aforesaid Infosys and the assessee are not comparable at all as seen from the financial data etc. of the two companies mentioned earlier in the order. Therefore, we are of the view that this case is required to be excluded." Similar view has also been expressed by the Hyderabad Bench of the Tribunal in the case of Trinity Advanced Labs P. Ltd. (supra). In the case of M/s. Genesys Integrating India P. Ltd. (supra), the Bangalore Bench of the Tribunal has observed in the following manner- "9. Having heard both the parties and having considered the rival contentions and also the juridical precedents on the issue, we find that the TPO himself has rejected the companies which are making losses as compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turnover of Rs. 1 crore to Rs 200 crores as the comparable range of size of companies and further from Rs. 200 crores to Rs. 2000 crores as another slab of turnover. This classification is based on dun Bradstreet having given different ranges of size of companies i.e. large, medium and smaller. Such classification by dun Bradstreet was not made in the context of comparables under TP Regulations. 47.3 It is pertinent to note that as per this classification of the company on the basis of turnover from Rs. 1 crore to Rs. 200 crores, an entity having Rs. 1 crore can be compared with an entity having Rs.200 crores turnover ; but at the same time, an entity having Rs. 200 crores turnover cannot be compared with the entity having Rs. 201 crores turnover. Thus, this classification gives unrealistic result as far as the comparability of two entities having difference of Rs. one crore only cannot be compared. In our view for the purpose of comparing the profit margin of functionally similar entity the classification of such slab range is not practically workable. Therefore, as it is apparent from this classification that two entities can be compared having difference in the turnover up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. -13.55 47.84 31.36 Upto 50 18. Triton Corp. Ltd. 34.93 53.36 19. I C R A Techno Analytics Ltd. (Seg.) 12.24 72.32 20. Eclerx Services Ltd. 90.43 86.2 31.29 Upto 100 21. Allsec Technology Ltd. 27.31 113.27 31.10 Upto 120 22. Aditya Birla Minacs 11.98 197.06 30.23 Upto 200 23. HCL Comnet (Seg.) 44.99 260.18 30.87 Upto 300 24. Infosys B P O Ltd. 28.78 649.56 30.78 Upto 650 25. Wipro Ltd. (Seg.) 29.7 939.77 30.74 Upto 940 47.5 It is manifest from this details and the comparative chart that there is no relation between the turnover and margin of an entity as it shows that the highest margin of the entity having Rs. 50 crores turnover and the lowest margin in case of the turnover upto Rs. 200 crores. It makes further clear that there is not much difference in the margin of the various entities having turnover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deration for determining the ALP, the assessee raised these objections. There is no quarrel on the point that if the comparables proposed to be taken into consideration by the TPO are having an abnormal differences of turnover in comparison to the turnover of the assessee, and if it is apparent due to such abnormal difference in the turnover, the operating profits of the comparables is got distorted then in such a case, those comparables should be excluded from the list of the ALP. 15. In the case in hand, the assessee raised these objections only because some of the comparables are having high profit and also high difference in the turnover and not because of the high or low turnover has influenced the operating margin of the comparables. All the objections and contentions raised by the assessee in respect of this issue are general in nature and no specific fact has been brought on record to show that due to the difference in turnover the comparables become non-comparables. The assessee has not demonstrated as to how the difference in the turnover has influenced the result of the comparables. It is accepted economic principles and commercial practice that in highly competit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransfer pricing proceedings and the TPO itself has taken the profile of the company as software services and products which is different from the business of the assessee, this company has to be excluded from the list of comparables. (xxiii) Maple Esolution Ltd. (xxiv) Triton Corpn Ltd: 50. The ld. AR has pointed out that Maple Esolution Ltd. acquired by Triton Corpn Ltd., therefore, Maple Esolution Ltd. was converted into Triton Corporation. He has further submitted that the Directors of Maple Esolution Ltd. were involved in fraud as has been considered and rejected by the Hyderabad Benches of the Tribunal in the case of Capital IQ Information (supra). He has also relied upon the decision of the Delhi Benches of the Tribunal in the case of CRM Services Ltd. in ITA 4068/Del/2009 = (2011-TII-86-ITAT-DEL-TP). The ld. AR has further submitted that though Maple Esolution Ltd. is a comparable company selected by the assessee in the TP study; however, based on the above facts, Maple Esolution Ltd. and Triton Corpn Ltd., both are required to be rejected as comparable. In support of his contention, he has relied upon the order of this Tribunal in the case of Stream ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... because the said person happens to be the director of these companies, cannot render these companies as non-comparables. There is no allegation against these companies or business activity of these companies. Therefore, it cannot be considered that the business or results of these companies are in any manner influenced or affected by the allegation of fraud against the directors in respect of other business activity that too more than two decades back. 51.1 So far as the Maple Esolution Ltd., is concerned, this company was selected by the assessee itself in TP study as comparable; therefore, we are not inclined to accept the objection raised by the assessee before us that the directors of these companies were involve din the fraud. 51.2 However, since Triton Corpn Ltd., acquired by Maple Esolution Ltd., therefore, we are of the view that if extra ordinary events like merger and de-merger or amalgamation took place during the financial year relevant to the Assessment Year under consideration, and because of the merger/de-merger the company became functionally different then the said company should be excluded from the comparables. However, if the merger of the two functionally s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave decided the identical issue while discussing the comparable Accentia Technologies Ltd. in paras 17 to 18.3. Accordingly, we direct the Assessing Officer/TPO to verify this fact and accordingly decide the comparability of the company. (xxvi) R System International Ltd: 53. We have heard the ld. AR as well as the ld. DR and considered the relevant material on record. Apart from the other objections, the ld. AR of the assessee has submitted that this company had related party transactions of 21.19% of the total turnover; therefore, it cannot be considered as a comparable. 53.1 On the other hand, the ld. DR has relied upon the decision of the Delhi Benches of the Tribunal in the case of Actis Advisors P. Ltd. and submitted that related part transaction is less than 25% of the total turnover and therefore, it can be a good comparable. There is no dispute on related party transaction of this company constituting 21.19% of the turnover. Hence, in view of our finding in the foregoing paras on this issue, this company cannot be considered as a good comparable (xxvii) Specco Ltd. (xxviii) Spanco Telesystems Solutions Ltd: 54. The ld. AR has submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this comparable. Risk Adjustment And Working Capital Adjustments; 57. The ld. AR has submitted that the TPO as well as the CIT(A) did not consider the submissions regarding the risk adjustment and working in capital adjustment. He has further submitted that for the AY 2006-07, this Tribunal in assessee's own case has accepted that the adjustment with respect to risk and working capital were to be given but remanded the issue to the Assessing Officer for quantification. 57.1 On the other hand, the ld. DR has submitted that the assessee has not claimed risk adjustment in the TP report; but the same was claimed only after TPO proposed the adjustment. He has referred the rule 10B(3) of the IT Rules and submitted that onus is on the assessee to prove whether the risk adjustment is required because of the reasons that such factors has materially effect the price or cost charged or paid or the profit arising from such transaction in the open market. Thus, the ld. DR has submitted that as per Rule 10B, a reasonable and accurate adjustment can be made to eliminate the material effect of such difference. He has also referred and relied upon the UN Manual of transfer pricing and subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade on adhoc basis but it should be based on some tangible material and accurate calculation of quantification of the comparative risk. For the AY 2006-07, this tribunal in para 24 25 has observed and remanded the issue as under: "24. We have considered the detailed submissions made by the learned Counsel and the learned DR. At the outset we have noted that the information obtained by AD by writing to various companies while selecting the comparables has not been provided to assessee at all. Assessee has raised these objections not only before the TPO but also before the DRP. Since information relied upon by the TPO is not available in public domain, it is incumbent on the TPD to furnish the relevant information to assessee. In a case where the information is not furnished to assessee it becomes secret information which can not be used against assessee. Most of the objections raised by assessee with reference to the selection of comparables by the TPO are with reference to the information not available in the public domain, but obtained by TPO and also with the various filters considered by the TPO in rejecting assessee's comparables. We also notice that there is no unifor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e made. In view of this, we are not fully agreeing with assessee's contentions as far as risk adjustment is concerned. Further, there is no correlation with bank lending rates and risks involved as claimed by assessee." 58.3 Accordingly, the issue regarding risk adjustment and working adjustments are remanded to the record of the AO/TPO for verification and adjudication as per law after considering the rival submissions made before us. ITA No.4429/Mum/2012 (by Revenue): 59. The revenue has raised the following grounds in its appeal: "(a) On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in holding amount of Rs. 47,13,384/-paid to Equant Network Services Ltd., was neither royalty nor fees for technical services without appreciating that the payment made to Equant Network Services Ltd., is in the nature of royalty payment since it involves the use of commercial equipment. (b) On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in ignoring the ratio the decision of ITAT Hyderabad in the case of Frontline Soft Ltd., wherein such payment was held to be royalty'. 2. (a) On the facts and circumstances of the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 is as under: "11. As already noted by us, the payments made by the assessee in the present case to Equant in connection with the satellite link charges were for the use of standard facility which did not involve use or right to use the channel of communication. Equant was providing multipoint data connectivity services to the assessee to facilitate data communication with its clients belonging to Willis group having their offices at Ipswich, UK and Nashville, USA. The intention of the assessee company was to avail connectivity services and it was not concerned as to which equipments were used to provide such connectivity services. The assessee had no right to access the equipments forming part of communication channel except for data communication and transmission. The assessee had no control over the said equipments or physical access to it. There is nothing to show positive act of utilization, application or employment of equipment for the desired purpose. The assessee could not come face to face with the equipments, operate it or control its functions in some manner. It had no possessory rights in relation to the said equipments. It only took advantage of a facility of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he CIT(A) is contrary to the fact where the said company has utilized more than 80% of the seating capacity of the employees. 62.1 On the other hand, the ld. AR has submitted that the information produced by the ld. DR as obtained u/s 133(6) was not addressed to the concerned TPO. Further, the said information was not complete in the context that whether this company has outsourced its business or not. The ld. AR has referred the Schedule 15 to the balance sheet and pointed out that for a sale of Rs. 31 crors only Rs. 70 lacs were paid towards salary to the employees and Rs. 13 crores were paid to the vendors for outsourcing services which shows that the major business of the said company was outsourcing. In support of his contention, he has relied upon the following decisions: (i) Maersk Global Services Centre ITA No.3774/Mum/2011 = (2011-TII-133-ITAT-MUM-TP) (ii) Nextlinx India P. Ltd. ITA No.454/Bang/2011 = (2012-TII-139-ITAT-BANG-TP) (iii) 24/7 Customer Comm (P.) Ltd. ITA No.227/Bang/2010 = (2012-TII-143-ITAT-BANG-TP) (iv) Google India P. Ltd. ITA No.1368/Bang/2010 (vi) Brigade Global Services P. Ltd. ITA No.1494/Hyd/2010 63. We have consi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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