TMI Blog2014 (9) TMI 258X X X X Extracts X X X X X X X X Extracts X X X X ..... . Functionally different company – Salary cost as percentage of the total cost is very abnormal – Held that:- M/s. Vishal Information Technologies cannot be considered as a comparable case as this company was rejected in Brigade Global Services (P.) Ltd v. ITO [2014 (9) TMI 143 - ITAT HYDERABAD] - the employee's cost to total cost ratio is worked out at 2% as compared to the industry average of 30 to 40% - The assessee's employee's cost to total cost ratio is worked out at 47% - Since the employee's cost form major cost base in ITES service industries, the low ratio of comparables implies that it would not be providing services by employing its own sources - the assessee is not alike to M/s. Vishal Information Technologies Ltd. - M/s. Vishal Information Technologies Ltd., cannot be considered as comparables and it is to be excluded from comparables - Decided in favour of Assesse. Adjustment for the difference in rate of depreciation charged not granted - Profit before Depreciation and Tax to total cost as Profit Level Indicator not considered – Held that:- Assessee rightly contended that the TPO did not consider the fact that the margin of the Assessee Company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s substituting the Appellant's analysis with fresh comparability analysis on his own conjectures and surmises, 4. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding/confirming the action of the Ld. TPO in rejecting the following filters applied by the Appellant: i. Rejection of companies with Net Fixed Asset to Sales ratio greater 200%; and ii. Rejection of companies having Research and Development expense to Sales ratio in excess of 3%. 5. On the facts and in the circumstances of the case and in law, the Ld. TPO erred and the Ld. CIT(A) further erred in upholding/confirming the action of the Ld. TPO in adopting arbitrary quantitative criterion for selection of alleged comparable companies during the course of assessment proceedings. Thus the methodology adopted by the Ld. TPO lacks basic statistical principles and economic prudence. 6. On the facts and in the circumstances of the case and in law, the ld. TPO erred and the Ld. CIT(A) further erred, in upholding confirming the action of the Ld. TPO in not sharing a detailed step by step search strategy adopted and the Functional, Assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in law, the Id. CIT(A) erred in upholding confirming the action of the ld. TPO in not rejecting VishaI Information Technologies Limited (Vishal) in spite of the fact that its salary cost as percentage of the total cost is very abnormal indicating difference in the functional profile of the Appellant and Vishal. Thus the TPO has adopted inconsistent and selective approach for the selection of the comparable companies 12. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding/confirming the action of the ld. TPO in not considering finance charges/miscellaneous expenses written off as part of operating expenses while computing the margins of the comparable companies. D. Use of non-contemporaneous data: 13. On the facts and in the circumstances of the case and in law, the Ld. TPO erred and the Ld. CIT(A) further erred in upholding/confirming the action of the ld. TPO of conducting a benchmarking analysis using non contemporaneous data. 14. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding/confirming the action of the Ld. TPO in not allowing the use of multiple year dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in law, the Ld. TPO erred and the Ld. CIT(A) further erred, in upholding/confirming the action of the Ld. TPO in selecting high profit margin companies on one hand and rejecting loss making or low profit margin companies on the other hand to arrive at the Arm's Length Price (ALP). Thus the approach adopted by the Ld. TPO lacks consistency and contains inherent contradictions. 5. The learned AR submitted that by applying this filter, the TPO has rejected companies without considering whether the companies are functionally comparable or not. The TPO as well as the CIT(A) failed to appreciate that the companies incurring losses should also be considered in the comparable companies set, to arrive at a margin which is reasonable, rational and which takes into account a variety of commercial and financial conditions. A company, which is otherwise a comparable company, should not be rejected only on the ground of diminishing revenue or on the ground that it has incurred losses. The TPO had rejected all the loss making comparables selected by the assessee-company in its TP study for various reasons which amounted to cherry picking of the comparables. The TPO rejected FI Sofex, Map ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ark Systems (P.) Ltd. [2010] 38 SOT 307 (SB), held as under: 25 While we agree that merely because a comparable is making loss, it cannot be excluded from the list or comparables (or the purposes of computation or arm's length price. lmercius is a case in which not only functional area is different. Imercius has a negative net worth but also because turnover of the Imercius has no comparison with the assessee companies (b) The Mumbai Tribunal in the case of Teva India (P.) Ltd. v. Dy. CIT [2011] 44 SOT 105 (URO) made similar observations while rendering its decision. The Tribunal held that a comparable could not be excluded only on the ground of losses. 9. The AR submitted that in case loss making companies are excluded to arrive at the ALP, then in that case even extraordinary high profit margin companies should also be excluded for arriving at the ALP. In view of the same, the AR requested to reject/exclude the following companies from the final list of comparables as the margin earned by them is abnormally high: (a) Vishal Information Technologies Limited. [45.62%] (b) Nucleus Netsoft Gis India [40.06%] 10. The AR submitted that the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmitted that Maple e-Solutions commenced its business of providing ITES services from 29th November, 2004 by setting up a 100% EOU unit and was operational only for a period of 4 months during the FY 2004-05. In view of the above mentioned facts, Maple e-Solutions merits rejection as the same was operational for less than 12 months period. The AR further submitted that the Directors of Maple e-Solutions are found to be involved in fraud and accordingly, its financial statements cannot be trusted and are not reliable. The AR relied on the following cases: (a) Cognizant Technology Services (P.) Ltd. v. ACIT [IT Appeal Nos. 2106 1864 (Hyd) of 2011). (b) Market Tools Research Pvt. Ltd. vs. ACIT (32 Taxmann.com 358) (c) Capital IQ Information Systems (India) (P) Ltd. vs. DCIT (International Taxation) (2013) 32 Taxmann.com 21) (d) HSBC Electronic Data Processing India Ltd. vs. Addl. CIT (2013) (ITA No. 1624/Hyd/2010). (e) ITO v. CRM Services India (P.) Ltd. [2011] 48 SOT 41 (URO) (Delhi) (f) Stream International Services (P) Ltd. vs. ADIT (International Taxation) (31 Taxmann. Com 227) (Mum). 17. The DR relied on the order of the lower ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Vishal in the final list of comparables to arrive at the ALP. The AR argued that the salary cost of Vishal as a percentage of total cost is very low and therefore it is not functionally similar to the assessee-company. The CIT(A) did not consider the above submission made by the assessee- company and simply relied on the order of the TPO and stated that the TPO has not adopted any filter with respect to salary cost. Further, since the comparable is satisfying all the filters adopted by the TPO, the said comparable cannot be rejected. 21. The AR submitted that in view of the above mentioned facts, Vishal provides agency services by way of outsourcing the services to third party vendors and acting as an intermediary between the final customer and the vendor as against the assessee-company which provides ITES service on his own. The assessee-company's wages to total cost ratio is 45%, whereas wages to total cost ratio of Vishal is mere 1% as compared to industry average of 30-40%. The following table provides the information of vendor payment charges as a percentage of sales and also the personal cost as a percentage of sales of Vishal for a period of three years: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3] 143 ITD 59 and Capital IQ Information Systems (India) (P.) Ltd. v. Dy. CIT while directing exclusion of the aforesaid company. In this view of the matter, we direct the Assessing Officer to exclude this company from the list of comparables. (b) The Tribunal in the case of Zavata India (P.) Ltd. v. Dy. CIT held as under: 17. As could be seen from the findings of the co-ordinate bench, the aforesaid company unlike the assessee has outsourced considerable portion of its business to third party vendor. Hence, it cannot be considered as a comparable. That besides the DRP in assessee's own case for asst. year 2008-09 has held that this company cannot be treated as a comparable. Therefore, considering the aforesaid fact, we are of the view that M/s Vishal Information Technology Ltd., cannot be taken as a comparable and direct for excluding the same from the list o{comparables. (c) The Tribunal in the case of Cognizant Technology Services (P.) Limited v. ACIT [IT Appeal Nos. 2106 864 (Hyd) of 2011], held as under: 17. .... the activities of the aforesaid company, as revealed from the annual report, is providing agency services by way of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... our considered opinion, these two cases were rightly excluded. In view o(the observations made by the DRP as well as the decision of the ITAT Mumbai in the case of Maersk Global Service Centre (supra), we accept that this company cannot be taken as a comparable. (e) The Tribunal in the case of Brigade Global Services (P.) Ltd. v. ITO [2013] 143 ITD 59 held as under: 46. We have heard both the parties on the above two comparables. Regarding Vishal information Technologies M/s. BA Continuum India Pvt. Ltd., the employee's cost to total cost ratio is worked out at 2% as compared to the industry average of 30 to 40%. The assessee's employee's cost to total cost ratio is worked out at 47%. Since the employee's cost form major cost base in ITES service industries. the low ratio of comparables implies that it would not be providing services by employing its own sources. Being so. the assessee is not alike to M/s. Vishal Information Technologies Ltd. Accordingly. M/s. Vishal Information Technologies Ltd, cannot be considered as comparables and it is to be excluded from comparables. (f) The Mumbai Tribunal in the case of ACIT vs. M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be considered as a comparable case as this company was rejected by co-ordinate Bench while deciding similar issue in the case of Brigade Global Services (P.) Ltd. (supra) wherein held that ... Regarding Vishal Information Technologies Ltd., the employee's cost to total cost ratio is worked out at 2% as compared to the industry average of 30 to 40%. The assessee's employee's cost to total cost ratio is worked out at 47%. Since the employee's cost form major cost base in ITES service industries, the low ratio of comparables implies that it would not be providing services by employing its own sources. Being so, the assessee is not alike to M/s. Vishal Information Technologies Ltd. Accordingly, M/s. Vishal Information Technologies Ltd., cannot be considered as comparables and it is to be excluded from comparables. 27. Being so, considering the decision of the co-ordinate Bench, we decide the issue in favour of the assessee and directing the AO not to consider M/s. Vishal Information Technologies as comparable while determining the ALP. 28. The next issue for our consideration is ground No. 16, which is as under: 16. On the facts and in the ci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be 38.74% (without working capital adjustment). Further, the working capital adjustment will increase from 1.59% to 1.74%. Thus, with the correct working capital adjustment, the revised arithmetic mean of the comparables will come to 37%. A detailed revised working of the margin of the assessee company, arithmetic mean of the comparables and working capital adjustment is on record vide Annexure A. The AR relied on the following case-law: (a) The Tribunal in the case of Market Tools Research (P.) Ltd. (supra) held as under: 11. ... c) All facts which impact the financial result of comparable companies should be taken into account and reasonable accurate adjustment should be made for the same. In this connection the rates of depreciation adopted by the assessee are significantly different from (straight line as compared with WTP; higher rate than that prescribed in schedule VI) those adopted by the comparable companies suitable adjustment for the different has to be made or the profit before depreciation may be considered.: (b) The Tribunal in the case of Qual Core Logic Ltd. vs. DCIT (2012) 22 taxmann.com 4, held as under: 57. ... It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of depreciations was making huge difference and required suitable adjustment. This claim has not been challenged. It is clear that the best way to adjust difference on account of depreciation was to ignore depreciation both in case of the tested party and the comparables. ... If depreciation is not leading to any difference, its exclusion is immaterial. If it is leading to differences, then differences are required to be adjusted, as required by provisions of IT Regulations. There is no way to dislodge the claim of the taxpayer. The context and purpose of legislation and facts of case overwhelmingly approve adoption of cash profit only. 23. As the deduction of depreciation is leading to wide differences, the same should be excluded. The only reason given for rejecting taxpayer's analysis and for making adjustment in the two years is that use of ratio of cash profit without depreciation is not permitted under the law. This view in the light of above discussion cannot be accepted as correct and is disapproved. (d) The Mumbai Tribunal in the case of Dy. CIT v. Reuters India (P.) Ltd. held as under: 4. ... It is further important to note that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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