TMI Blog2014 (9) TMI 192X X X X Extracts X X X X X X X X Extracts X X X X ..... ited has a different business model than that of the assessee, as it outsources execution of contracts to external vendors to save cost on employees which is also evident from the fact that employee cost for Vishal is 3% to the total cost, whereas in case of assessee, it is 60% to the total cost - the assessee was involved in the business of Information Technology Enabled Services, and revenue sought to include M/s Vishal Information Technologies as comparable to compute the mean margin of the comparables, it was held by the ITAT that such comparable is functionally not comparable. Relying upon First Advantage Offshore Services (P.) Ltd. Versus Deputy Commissioner of Income-tax, Circle - 11(3), Bangalore [2012 (6) TMI 572 - ITAT BANGALORE] - in the case of an ITES company, employee cost should definitely be more than 25% of the total expenses as in the ITES segment, the entire work is to be done by the employees and companies whose employee cost is less than 25% must be excluded - since the employee cost/operating sales of M/s Vishal Information Technologies Ltd. is a mere 3%, whereas the threshold limit for acceptance as a comparable on the basis of employee cost to sales shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s further erred both in law and, on facts in making an addition of ₹ 5,37,25,821/- on account of alleged understatement of arm's length price in respect of international transactions entered between the assessee company and its associated enterprises ( herein after referred to as AE ) 3. That in making the aforesaid addition the learned Assistant Commissioner of Income Tax had erred in referring the matter to the learned TPO u/s 92CA of the Act on the following amongst other grounds, rendering the order of the TPO as unsustainable both in law and on facts: (a) As none of the conditions precedent laid down under section 92C(3) of the Act were satisfied, there was no occasion for determination of arm's length price by the AO and the value of the international transactions ought to have been accepted; (b) As the reference made by the learned AO to the learned TPO is not in accordance with the provisions of Section 92CA(1) of the Act; (c) As no opportunity of being heard was granted at any stage of the proceedings for this purpose, either at the stage of proposal or even at the stage of approval; (d) As no initial opinion was formed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice and, instead used single year data of companies to conclude the arm's length price of the international transaction. 5.6 That on facts and in law, the Hon'ble DRP and learned TPO/AO have cherry picked comparables to accomplish pre-conceived conclusions, with the sole objective of rejecting comparables selected by the appellant and arriving at skewed results. 5.7 That on facts and in law, the Hon'ble DRP has erred in rejecting comparable company namely CG Vak Software Exports Limited on account of having significant related party transactions without appreciating the fact that the Appellant has considered consolidated financial statement which nullify the effect of related party transactions at the standalone level. 5.8 That on facts and in law, the Hon'ble DRP has erred in applying the filter of rejection of Ace Software Exports Limited showing declining revenue trends. 5.9 That on facts and in law, the Hon'ble DRP and learned TPO/AO have failed to make appropriate adjustments to account for varying risk profiles of the Appellant vis- -vis the comparables and in the process also neglected the Indian transfer pricing regulati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The facts as per the relevant Orders and other documents on record are that: (i) the Assessee Company, M/s Techbooks International Pvt. Ltd. was incorporated on 12.6.2000 under the Companies Act, 1956. It is a wholly owned subsidiary of Aptara, Inc., USA., engaged in the business of provision of data conversion, data entry or keyboarding, reformatting and typesetting services, which was exported only to Aptara Inc, USA, i.e. its holding company. Apart from the above, the Assessee Company had no other business activity during the year under consideration, i.e., A.Y. 2007-08. To carry out the said activity, the Assessee Company had a 100% Export Oriented Undertaking or EOU (hereinafter referred to as 'the Undertaking') registered with the Software Technology Park of India. The income derived by the Assessee from the Undertaking is eligible for deduction under section 10B of the Income Tax Act, 1961 (hereinafter referred to as 'the Act'). The assessment year under consideration is the sixth year of the claim of deduction under section 10B of the Act; (ii) On 31.10.2007, the Assessee Company filed its return of income for the assessment year under consideration, declari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rage margin of profit for the years ending in 2005, 2006 and 2007 was calculated at 21.51% and allowing a variance of +/-5% variance from the mean ALP, the range of ALP of the comparables would fall between 115.43% and 127.58%, translating to a range of operating margins between 15.43% and 27.58% on operating cost (APB 79), the margin of profit declared by the Assessee at 15.58% was at arm's length. The comparables selected by the Assessee are as follows: S.No. Particulars 3 years' data as per Transfer Pricing Study without capital adjustment 3 years' latest data available in the public domain without working capital adjustment Using latest contemporaneous data (FY 2006-07) available in the public domain without working capital adjustment 1. Ace Software Exports Limited 11.88% 5.59% -7.04% 2. Allsec Technologies Ltd 27.47% 27.47% 27.21% 3. Apex Adva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e NC * The company has not been considered comparable on account of significant related party transactions. NC # The company has not been considered comparable on account of being functionally dissimilar. (vi) Vide letter dated 9.12.2009, the Assessing Officer referred the international transaction entered into by the Assessee Company to the Transfer Pricing Officer ('TPO') to determine the arm's length price thereof; (vii) By virtue of Order dated 29.10.2010 (APB 126 to 139), passed under section 92CA(3) of the Act, the TPO did not agree with the analysis undertaken by the Assessee Company. He made the following observations/adjustments in respect of the TP analysis undertaken by the Assessee as regards its international transaction: (a) The margin earned by the Assessee from the IT enabled data conversion services was very low. (b) In determining the arm's length nature of the international transaction of the Assessee, the financial information of comparable companies pertaining to only FY 2006-07 ought to have been used, since it was contemporaneous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... virtue of Assessment Order dated 21.10.2011, the AO made an addition of ₹ 5,37,25,821/- on account of adjustment of ALP in respect of the Assessee's transaction with its AE. The income of the Assessee was thus determined by the AO at ₹ 5,97,19,420/-; (xiii) Aggrieved, the Assessee is before us by way of the present Appeal. 3. The parties have made oral submissions before us and written submissions have also been filed. The ld. Counsel for the Assessee has contended that the adjustment made by the AO on the basis of the directions issued by the DRP is unsustainable; REGARDING CG VAK AND ACE SOFTWARE that the DRP has acted without jurisdiction in rejecting CG VAK as a comparable, for the reason of its having related party transactions of more than 25%; that there were no related party transactions in the consolidated financial statements considered by the Assessee for analysis; that the Assessee Company had used the BPO services segment of CG Vak to compute the comparable operating margins; that the revenue earned by CG Vak in its BPO services segment was exactly the same as that earned by it in the BPO services segment, as given in the consolidated financia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d reason that the said Company did not have export revenues for FY 2006-07; that this is an arbitrary reason for rejection; that domestic Companies are equally good comparables for ALP; that for the purpose of comparability, it is essential to consider the activity/functions performed, by the entities to be compared, rather that the customer location; that the mere fact that a comparable does not have foreign exchange income and caters only to customers based in India, is not sufficient for discarding the company as a comparable; and that if Ask me is considered as a comparable, the operating margin of the Assessee would be within arm's length range. 4. It has further been contended on behalf of the Assessee that the Authorities below have failed to appreciate that Assessee had entered into such transactions with its associated enterprise in the earlier years also and the margin of profit with its associated enterprise was accepted by the Authorities at 16% for A.Y. 2005-06 and at 14.92% for A.Y. 2006-07. 5. It has then been submitted that the ld. DRP has erred in not allowing the benefit of -5% available under the proviso to section 92C(2) of the Act, considering which, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue. (Paras 29 till 31, Pages 8 till 10 of the order of the DRP; that this is the settled position of law; that with regard to consistency, even the benchmarking margin arrived at by the assessee itself was varying every year; that besides, the ITAT, has held that consistency is not a valid argument in a transfer pricing situation; that reliance in this regard is placed on orders of the ITAT, Delhi in the case of Dy. CIT v. Carraro India Ltd. (2008) -TIOL -519-ITAT-DEL; that further, the assessee itself has relied on the order of Asstt. CIT v. Hapag Lloyd Global services (P.) Ltd. order dated 28/02/2013, A.Y. 2005-06, in ITA No. 8499/M/2010; that in this case, it has been held, amongst other things, that filters are necessary and that comparables vary from year to year and from case to case; that reliance is also placed on the order of the Mumbai Tribunal, in 'Onward Technologies Ltd. ITA No. 7885/M/2010, order dated 30/04/2013,, wherein they have relied upon order of the Hon'ble Delhi High Court in the case of 'CWT v. Meatles (P.) Ltd.' 156 ITR 569 Delh, that it has also been held in the case of Advance Power, ITAT Mumbai, in ITA No. 6542/6732/M/2011, order dated 8. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , item No. 49, APB); that this entity fails the export earnings filter; that incidentally, the assessee itself is in the situation of substantial export earnings; that the export earnings filter has been approved in the case of Vedaris Technology (P.) Ltd. v. Asstt. CIT [2011] 44 SOT 316 (Delhi); that it has also been so held in the case of Indo American Jewellery Ltd. (supra); that the assessee has desired inclusion of M/s. Ace Software (P) Ltd.; that the reasons of the DRP for exclusion thereof are explicit (pages 7 8, paras 20-25 of the DRP's order); that relying on multiple year data for working out the trend such as persistent losses or persistent decline in sales is not the same as use of multiple year data for arriving at benchmark margin; that the assessee has desired exclusion of M/s. CG Vak Software; that the reasons of the DRP for not excluding are comprehensive; that the assessee has cleverly and inappropriately worked out the RPT quantum in this case; that it has been held in the case of ITO v. Nextlink India (P.) Ltd. ITAT Bangalore , ITA NO 454/Bang/2011, AY 2005-06 dated 19-10-2012, that even a 40% margin is normal in the case of ITES; that while choosing comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Ground No.8 This issue relates to safe harbour, and has been detailed earlier in this letter Counter to Ground No.9 The information as obtained from Vishal Information, as reproduced in DRP's order in para II, and pages 4 5 is only supportive of Departmental view point. Moreover reliance is placed even by the DRP on the case of Dy. CIT v. Deloitte Consulting India (P.) Ltd. [2012] 15 ITR 573, (para 13 of DRP, page No.5). Copy of this order is being placed.' 11. We have heard the parties and have perused the material on record. One of the contentions raised before us by the assessee is that if Vishal is not considered as a comparable Company, the operating margin of the Assessee Company would fall within arm's length range, as required by the Transfer Pricing Rules. The Department's response to this submission is that the assessee had itself found this entity as a comparable entity in its own benchmarking analysis for A.Y. 2007-08; that besides, the DRP has given detailed reasons in this regard (pages 3-6 of the DRP's order, paras 9-15). In this regard, reliance has been placed on the order of the Hyderabad Tribunal in the case of Deloitte Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otal expenses as in the ITES segment, the entire work is to be done by the employees and companies whose employee cost is less than 25% must be excluded. Following the aforesaid order of the Tribunal, the Bangalore Bench of the Tribunal, in the case of Symphony Marketing Solutions India (P) Ltd. v. ITO [2013] 38 taxmann.com 55, has again held that since the employee cost/operating sales of M/s Vishal Information Technologies Ltd. is a mere 3%, whereas the threshold limit for acceptance as a comparable on the basis of employee cost to sales should be at least 25%, the same is liable to be excluded. 16. Further, as held in SAP Labs India (P.) Ltd. v. ACIT (ITA No.398/Bang/2008),, Vishal is also an exceptionally high profit making company and should not be considered. 17. Then, over 20% of operating costs of M/s Vishal Information Technologies Ltd. consist of 'Work in Progress' and such a significant part of operating costs being 'work in progress' clearly signifies that the company is following a very different operating model from that of the assessee. Further, it has provided a Corporation Guarantee of ₹ 10.85 crores (amount to 35% of its turnover) on be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luded . 22. The DRP has referred, at page 4 of its order, to the information obtained by the department from M/s Vishal Information Technologies Ltd. This purported information was provided by Vishal Information letter dated 23.3.2010, which has not been made available to the assessee company and, as contended and not disputed, therefore, per-se, the same cannot be relied on. Moreover, such information pertains to AY 2008-09 and not AY 2007-08 and it has no applicability for the year under consideration. There are discrepancies in the profit and loss account. Thus, once it is admitted that there is discrepancy in respect of the information available in the public domain, the same can be excluded. 23. Last, but not the least, if Vishal, which has a different business model than that of the assessee, and is also an exceptionally high profit making company, is excluded as a comparable, the arithmetic mean will become 19.54%. This would fall within the range of +/- 5% both, according to the old proviso, as well as the amended proviso to Section 92C of the Act and the margin of profit declared would be at arm's length. Consequentially, no adjustment will have to be made. 24 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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