TMI Blog2014 (8) TMI 871X X X X Extracts X X X X X X X X Extracts X X X X ..... equired to perform ITES the comparability has to be done the company cannot be regarded as a comparable and deserves to be excluded from the list of comparables. Computation of the margin Rent for unutilized space as part of cost on which profit has to be earned Held that:- The operating margin of 12.42% on cost as calculated by TPO is not in line with the operating margin of 15.18% as calculated and submitted by the assessee - while calculating operational margin no adjustment for expenses of rent relatable to substantial portion of unused floor space has been carried out - The assessee has adjusted a sum of ₹ 33 lacs towards the unutilized floor space including 10893 square feet acquired in new block for future expansion - TPO/AO is directed to re-workout the TP adjustment as per the provisions after excluding the comparables Decided partly in favour of Assessee. Addition made u/s 10A Held that:- Following the decision in CIT v. Gem Plus Jewellery Ltd. [2010 (6) TMI 65 - BOMBAY HIGH COURT] - DRP though accepts such position but has decided the issue against the assessee only to give an opportunity to the department to pursue the same in higher forums - AO is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... similar, hence selected as comparables with weighted average arithmetic mean of 6.98%. Since assessee's net margin from the provision of services to its AE during the year at 15.18% was found to be within arms' length, no adjustment was made. 4. The TPO however rejected the TP study of assessee broadly on the following reasons : a. The assessee has used multiple year data and not the current year data. b. The companies engaged in IT enabled serves were treated as comparables irrespective of the verticals and horizontals. c. Most of the companies have been rejected by applying qualitative filters without furnishing details as to what were the qualities which were compared for selection/rejection of comparables. d. There is a complete disconnect between the search for the comparables and the comparability analysis. e. Assessee has considered companies as comparables although they have related party transaction of more than 25% of the operating revenue. f. The assessee has selected companies which are into domestic operations with marginal and no export earnings. 5. After rejecting the TP study, Assessing Office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15. Aditya Birla Minacs Worldwide Ltd., 197.06 10.78% 16. Cosmic Global Ltd., 4.28 11.11% 17. ICRA Techno Analytics Ltd., (Seg.) 7.23 11.18% 18. Apex Knowledge Solutions P. Ltd., 6.64 12.80% 19. R Systems International Ltd., (Seg.) 17.34 18.08% 20. Spanco Ltd., (Seg.) 35.00 19.40% 21. Caliber Point Business Solutions Ltd., 39.30 19.97% 22. Allsec Technologies Ltd., 113.28 25.47% 23. Bodhtree Consulting Ltd., (Seg.) 2.94 29.36% 24. Accurate Data Converter 4.33 47.96% 25. IServices India P. Ltd., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e extent of addition made under section 92CA. Even though learned Counsel withdrew the contention, we intend to make it clear that this issue has been crystallized by the decision of the Special Bench in Aztec Software Technology Services Ltd., (supra) wherein it was held as follows : 20. At one stage of hearing, learned counsel for assessee has also submitted before us that income of the assessee is exempt under s. 10A of the Act and, therefore, the overpricing or underpricing of an international transaction would not affect the computation of income. This argument is without force in view of the specific provisions contained in the first proviso to sub-s. (4) of s. 92C wherein it has been clearly stated that no deduction under s. 10A/10AA or s. 10B or under Chapter VI-A shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under this section. 21. It is abundantly clear that legislature while introducing the enactment did comprehend a situation requiring investigation and addition on account of computation of ALP in cases of the assessee entitled to benefit under s. 10A/10AA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection before DRP. As seen from other cases relied on by assessee for exclusion of certain comparables, these two companies were not objected and are accepted as comparables. Only principles of natural justice were violated while including them. Therefore TPO/AO is directed to give an opportunity to assessee take their objections and consider whether the above two companies can be included as comparables. 12.2 Accentia Technologies Limited The assessee is objecting to the aforesaid company being treated as comparable since the aforesaid company is functionally different from the assessee as more than 64% of the operating cost of the company is towards overseas business expenses. Further the company has substantial marketing expenses which was almost 29% of its sales as compared to almost nil of the assessee. It is also submitted that due to multiple acquisitions by the company during the year under dispute, it was an exceptional year impacting the profitability of the company. In this connection assessee relied on the decision of Income-tax Appellate Tribunal, Hyderabad Bench in case of Capital IQ Information Systems India Pvt. Ltd. (ITA No. 1961/Hyd/2011), Zavata India Pvt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st, 2008. Thus the effective date of the scheme of merger and demerger was 26th August, 2008. The Annual Report supported the argument of the assessee that there were merger and demerger in the financial year and it was all exceptional year of performance as financial statements were revised by this company much after the closure of the previous year. The Panel agrees with the contention of the assessee that it is an exceptional year having significant impact on the profitability arising out of merger and demerger. On careful consideration of the matter, we also agree with the aforesaid view of the DRP that extra-ordinary event like merger and de-merger will have an effect on the profitability of the company in the financial year in which such event takes place. It is the contention of the assessee that in case of the aforesaid company, there is amalgamation in December, 2006, which has impacted the financial result. This fact has to be verified by the TPQ. If it is found upon such verification that the amalgamation in fact has taken place, then the aforesaid comparable has to be excluded.' As can be seen from the order of the co-ordinate bench, the aforesaid company was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce in functionality and the business model, this Panel is of the view that 'Coral Hub' is not a suitable comparable to the taxpayer and hence needs to be dropped form the final list of comparables. In case of Asstt. CIT v. Maersk Global service Centre (India) (P.) Ltd. (Supra) the ITAT Mumbai Bench has also directed for exclusion of the aforesaid company, by observing in the following manner Insofar as the cases (Tulsyan Technologies Limited and Vishal Information Technologies Limited are concerned, it is noticed from their annual accounts that these companies outsourced a considerable portion of their business. As the assessee carried out entire operations by itself, in our considered opinion, these two cases were rightly excluded. In view of the observations made by the DRP as well as the decisions of the ITAT, we accept that this company cannot be taken as a comparable. 12.5 Eclerx Services Limited Assessee submitted that this company is engaged in providing knowledge process outsourcing (KPO). It was submitted that the assessee is providing data analytics, operations management and audit reconciliation. It was further submitted that besides ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed the relevant material on record It is observed that although a detail submission was made on behalf of the assessee before the learned CIT(A) on the basis of FAR analysis to show that the selection of Ms. Vimta Labs as comparable is not Justified, the learned CIT(A) has not accepted the stand of the assessee on the issue without giving any cogent or convincing reasons. In its recent decision rendered in the case of Adobe Systems India Pvt. Ltd., (ITA.NO.5043/Del/2000 dtd 21.01.2011) + (2011-TII-13-ITAT-DEL-TP), Delhi Bench of ITAT has held that exclusion of comparables showing supernormal profits as compared to other comparable is fully justified. We, therefore set aside the impugned order of the ld. 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 ITAT in the case of Abode Systems India Pvt. Ltd. (supra). In this view of the above, we accept the contentions of the assessee that this company cannot be treated as a comparable. 12.7 HCL Comnet Systems Services Limited, Infosys B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are liable to understand as to why there should not be an upper limit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the above, this company also carries out R D services and own intangibles. Therefore said facts, in our view, will take this company out of the list of comparables. In this regard, we may refer to the decision of the ITAT Bangalore Bench in the case of First Advantage Offshore Services (P.) Ltd. v. Dy. CIT [2012] 53 SOT 89, wherein it was observed as under:- 39. Having heard both the parties and having considered their rival contentions, we find that the assessee had raised elaborate objections to each of the comparables in group 3 before the TPO. The TPO has also reproduced the said objection in his order para 6.5.1. of page 178 of his order. He has rejected the contention of the assessee by holding that every function within BPO sector can be from low end to high end and the activities of the assessee such as accounting, web management, network management are BPO services using technology but these services are not categorized as KPO. He held that a call centre may offer support services like telemarketing to high end services like technical support services, where not only the level of knowledge, skill required would be high, hut the technical knowledge as we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as been carried out. The assessee has adjusted a sum of ₹ 33 lacs towards the unutilized floor space including 10893 square feet acquired in new block for future expansion. This issue was explained to the DRP in writing but the DRP and the TPO have not dealt with is in an appropriate manner and have merely rejected the claim without verifying it. We therefore direct the TPO/AO to give opportunity to assessee and consider the objections on the issue. 14. TPO/AO is directed to re-workout the TP adjustment as per the provisions after excluding the comparables rejected above and considering the comparables which require reconsideration after giving opportunity to assessee. AO/TPO is also directed to consider the cost issue as directed in para 12 above. With these directions the ground 2 is considered partly allowed for statistical purposes. 15. Ground no .3 Relating to Section 10A In this ground, assessee has challenged the reduction of communication charges from the export turnover without reducing it from the total turnover while computing deduction u/s 10A of the Act. This issue is squarely covered in favour of the assessee by the judgment of Hon'ble Bombay High C ..... X X X X Extracts X X X X X X X X Extracts X X X X
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