TMI Blog2016 (9) TMI 1308X X X X Extracts X X X X X X X X Extracts X X X X ..... turnover is concerned, we find that the order of the DRP is in accordance with the decision of the Hon'ble Karnataka High Court in the case of Tata Elxis [2011 (8) TMI 782 - KARNATAKA HIGH COURT] and respectfully following the same, we see no reason to interfere with the order of the DRP. - ITA No.310/Hyd/2015, ITA No.292/Hyd/2015 - - - Dated:- 12-9-2016 - Smt. P.Madhavi Devi, Judicial Member Shri S.Rifaur Rahman, Accountant Member For The Assessee : Shri K.R. Vasudevan For The Revenue : Smt. Nivedita Biswas, DR ORDER Per Smt. P. Madhavi Devi, J.M. ITA No.310/Hyd/2015: This is assessee s appeal for the A.Y 2010-11 against the assessment order passed by the AO u/s 143(3) r.w.s. 92CA(4) r.w.s. 144C(1) of the I.T. Act. 2. Brief facts of the case are that the assessee company which is providing back office data creations, content development services with its AE, filed its return of income for the aym2010- 11 on 13.10.2010 declaring Nil income after claiming deduction u/s 10A of the Act, amounting to ₹ 5,24,16,660/-. Observing that the assessee company, has entered into international transactions for an amount of ₹ 40.01 crores during t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted the correct turnover as provided in clause (iv) to Explanation-2 of sub section. He therefore, added the T.P. adjustment be the income of the assessee and further reduced a sum of ₹ 40,44,693 being internet expenses/telephone charges for the purpose fo computation of income u/s 10A of the Act. Aggrieved, the assessee is in appeal before us. 3. The assessee has raised as many as 20 grounds of appeal and has also filed an application for admission of additional grounds of appeal which is numbered as Ground Nos.6.1 and 6.2. At the time of hearing the learned Counself or the assessee submitted that Ground Nos. 1 to 3 are general in nature, hence no need for adjudication. He also submitted that Ground Nos. 7, 9, 10 13 are not pressed. These grounds are accordingly rejected as not pressed. 4. As regards Ground No.4 against the order of the AO/DRP in considering foreign exchange loss amounting to ₹ 1,12,94,338 incurred by the assessee as operative in nature while computing the net margin of the assessee under the TNNM method, the learned Counsel for the assessee failrly admitted that this issue is covered against the assessee by the orders of this Tribunal. We find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of the assessee under the TNNM method, the learned Counsel for the assessee submitted that this issue is covered in favour of the assessee by the decision of the Coordinate Bench of this Tribunal in the case of M/s. Astrix Laboratories Ltd vs. ACIT in ITA No.2181/Hyd/11 312/Hyd/12, dated 29.01.2016 for the A.Y 2007-08 respectively. The learned DR however, supported the orders of the authorities below. We find that the assessee has raised objection before the DRP that the margin has to be paid at segmental level and adjustment should be made only to AEs. The DRP has only confirmed the order of the TPO holding that the TPO has countered the objections of the assessee. In the case of M/s Astrics Lab Ltd, this Tribunal at para 26 of its order has directed the AO/TPO to take into account the turnover of the transaction with the AE only for the purpose of determining the ALP. For the sake of ready reference, Para 26 is reproduced hereunder: 26. As regards the assessee s ground No.3 and 4, we find that the assessee has also transactions with non- AEs and the TPO has taken the total turnover including transactions with non-AE companies, for the purpose of determination of ALP. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid company develops for the business products outsourcing. The learned Counsel for the assessee also relied upon the annual report of Accentia to substantiate his argument that the services provided by Accentia including software and hardware products. He also drawn our attention to the extracts of the annual reports which show that the Accentia owns intellectual property and there were extra ordinary events during the year such as strategic and amalgamation during the financial year 2009-10. He submitted that in the assessee s case for A.Y 2009-10, assessee has rejected the said company on the ground that the Accentia has made abnormal profits due to extra ordinary event. He also placed reliance upon the decision of the ITAT in the case of Hyundai Motor India Engineering in ITA No.1743/Hyd/2015, wherein after discussing the issue at length, has directed the AO to exclude this company as a comparable. The learned DR, on the other hand, supported the orders of the authorities below and submitted that the decision of the ITAT in Hyundai Motor Engineering Ltd which is engaged in the business of automobiles with the assessee herein is in ITES services. Therefore, according to him the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation as well as receivables, management services including installation and maintenance of all software, hardware and band width infrastructure required for the same, deployment of man power and service delivery in all these areas. It is also seen that it is engaged in legal process outsourcing. From Schedule-IV showing the fixed assets of the assessee, it is also seen that the said company owns goodwill/brand/IPRs (Intellectual Property Rights). From the notes to the accounts, it is also seen that a subsidiary of the company Asscent Infoserve Pvt. Ltd., has been amalgamated with the company consequent to which, assets and liabilities of the erstwhile company were transferred and vested in the company w.e.f. 1st April, 2008 and the scheme has been given effect to in the accounts of the year. Therefore, it is clear that there is an extraordinary event in the case of Accentia Technologies Ltd., during the relevant financial year particularly since the approval for amalgamation has been given by the Hon'ble High Court of Mumbai vide orders dated 21st August, 2009 and by the Hon'ble Karnataka High Court vide orders dated 6th February, 2010. This event would definitely have an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al, by relying on the decision of the Tribunal at Delhi in the case of Mercer Consulting (India) P. Ltd., ITA.No.966/Del/2014 dated 06.07.2014 has held as under: (4) Cosmic Global Ltd. 14. The main objection of assessee with reference to the inclusion of this company is with reference to outsourcing of its main activity. Even though this company was selected as comparable in assessee's TP study, it has raised objection before the TPO that this company's employee cost is less than 21.30% and most of the cost is with reference to the outsourcing charges or translation charges, and as such this is not a comparable company. The TPO, though considered these submissions, rejected the same, on the reason that this does not impact the profit margin of the company. Opposing the view taken by the TPO, it is submitted that this company cannot be selected as comparable, as similar issue was discussed by the coordinate Bench of the Tribunal(Delhi) in the case of Mercer Consulting (India) P. Ltd. (supra), vide paras 13.2 to 13.3 which read ass under- 13.2. Now coming to the factual matrix of this case, we find from the material on record that outsourcing charges of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the above referred case, in this case also we accept the contentions of assessee and direct the Assessing Officer/TPO to exclude this comparable for the same reasons. 10.4. We find that in the A.Y. 2010-2011 also as observed by us above, the facts are similar and the segmental revenue is on the lower side. Further, though the assessee had accepted this company as comparable before the TPO, it had raised detailed objection before the DRP and the DRP ought to have considered the objections of the assessee as the assessee is entitled to raise the objection before the appellate authority for factual differences to be considered. Further, since the Tribunal in assessee's own case for the earlier year held this company to be not comparable to the assessee. Respectfully following the decision of the Coordinate Bench in the assessee s own case for A.Y 2009-10, we direct the AO/TPO to exclude this comparable from the final list for the same reason As the facts and circumstances before us are also similar and are for the same A.Y 2010-11, we respectfully following the decision of the Coordinate Bench direct the AO/TPO to exclude this company from the prime list of comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the assessee in proper perspective. Any circumstance which would influence or result in abnormal result in the financials of a company have to be adjusted or where no adjustment can be done to make it comparable to the tested party, such a company has to be excluded from the list of comparables. This Tribunal in a number of decisions held that exceptional circumstance is a reasonable filter to exclude a company from the list of comparables. Therefore, we direct the A.O./TPO to exclude this company from the final list of comparables. 11.2.1. As regards TCS e-Serve Limited is concerned, we find that it possesses brand value as is evident from the Schedule-N (Operation and Other expenses) to the P L AI c of the annual report for the financial year 2009-10 of ₹ 46,065 thousands and also that it possesses intangibles in the form of software licenses which have not been taken note of by the authorities below while adopting its margin. It is also the case of the assessee that this company has a turnover of ₹ 1405.10 crores which is 25 times of the turnover of the assessee and hence, is not comparable to the assessee. The Ld. Counsel for the assessee had also pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t that this company be excluded from the list of final comparables. Accordingly, assessee's grounds of appeal No.6 is partly allowed . Respectfully following the decision of the Bench, these two comparables TCS e-Serve International Ltd and TCS e-Serve Ltd directed to be excluded. 12. As regards Crossdomain Solutions Ltd, the learned Counsel for the assessee fairly admitted that in the case of Hyundai Motors, comparability of this company has been upheld by the Tribunal. Therefore, he has no objection to the said company being included in the final list of comparables. We find that at Para 8 of the orders in the case of Hyundai Motors, the Tribunal has held as under: 8. At the time of hearing, the learned Counsel for the assessee submitted that the company Crossdomain Solutinos P. Ltd., has been considered as a comparable to the assessee in assessee's own case for the earlier assessment year and the ITAT has upheld the contention of the Revenue that the said company is comparable. He therefore, fairly admitted that this issue is covered against the assessee in assessee's own case. In view of the said submission of the assessee, we see no reason to interfere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e suffers from defects which has resulted in selection of inappropriate comparables and rejection of comparables that are appropriate com parables. He, therefore, rejected the T.P. document of the assessee and proceeded to make independent analysis by aggregating all the transactions under TNMM. 9.3. The TPO conducted the FAR analysis and as regards the ITES services carried out by the assessee, he adopted the TNMM as the most appropriate method for determining the arms length price. Thereafter, he conducted fresh search on the databases 'Prowess' and 'Capitaline' and selected the following 11 companies as final comparables and arrived at the average margin of the comparables at 28.39%. S. No Nature of the company OR OP/OC 1 Accentia Technologies Ltd 93,12,44,808 49.02 2 Acropetal Technologies Ltd (Seg.) 46,39,36,810 10.12 3 Axis-I.T. T Ltd 20,29,67,892 11.89 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms International Ltd. Further, he has also submitted that if Ground No.6 is allowed, then the ground become academic as held by the Tribunal in the case of Hyundai Motor India Engineering. 15. Having regard to the rival content ions and the decision of the Coordinate Bench in the case of Hyundai Motor India Engg. there is no reason to adjudicate the ground at this stage. Accordingly Ground 89(i) and 8(ii) are rejected. 16. As regards Ground No.11, the learned Counsel for the assessee submitted that the negative working capital adjustment should not be made as the assessee is fully funded by the AE and does not bear any working capital, more particularly as it is being compensated with a cost + basis. The learned Counsel placed reliance upon the decision of the Coordinate Bench of this Tribunal in the case of Adaptec India P Ltd in ITA No.206/Hyd/2014 wherein it was held that the negative working capital should not be made in the case of capital services provided. Without prejudice to the above, it is further submitted that the TPO had taken incorrect amount as its account receivable/payable and arrive at negative capital working of minus(2) whereas correct working capital wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mit the details of raising the invoice and subsequent receipts. TPO proposed to charge interest at 12% on the outstanding receivables. While replying that assessee is a fully funded entity of the AE and the amounts outstanding are on services but not loan or advances given. It also does not have any working capital risk and there is no interest payment also. It relied on the order of the ITAT in the case M/s. Evonik Degussa India Private Limited in ITA No. 7653/Mum/2011, wherein it was held that TP adjustment cannot be done on hypothetical issues. Assessee also further relied on the decision of Logix Micro Systems Ltd v. ACIT [42 SOT 525] (Bang) wherein ITAT held that a reasonable period should be provided as interest free period and no interest should be calculated for such period. However, while calculating the interest of 12%, TPO neither considered the above decisions nor gave any interest free period. Not only that even though Assessee realized the amounts in later year, i.e., after 31-03-2010, interest was charged for whole of the period. As can be seen from the table in page 45 of the TP order, TPO charged interest for the supposed delay not only during the year but also for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts adjusted in working capital adjustments and another separate addition is not required under the TP provisions. Thus, it was contended that the outstanding amounts are not to be considered for adjustment. 17.3. We have considered the issue and examined the rival contentions. In the case of Evonik Degussa India P. Ltd., in ITA No. 7653/Mum/2011, it was already held the TP adjustment cannot be made on hypothetical and notional basis, until and unless there is some material on record that there has been under charging of real income. Thus on the facts and circumstances of the case, we are of the opinion that addition on account of notional interest relating to alleged delayed payment in collection of receivables from the AEs is uncalled for on the facts of the present case. Even though DRP tried to distinguish the above decision on facts, as seen from the facts in both the cases, we are of the opinion that the above decision will equally apply to Assessee s case. Assessee has outstanding service charges receivables and as seen from the order of TPO, the outstanding is only from 31-07-2009. There seems to be no such delay in earlier months. Assessee has no interest liability at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany has been regarded as KPO and not comparables to the ITES. The learned DR relied upon the order of the TPO, while the learned Counsel submitted that M/s. E-Clerx Services Ltd is functionally similar with the assessee and no segmental information is available. It is submitted that E-Clerx is an India Process Outsources Company engaged in providing data analytical and data management and process improvement solution, wherein it would collate raw data and analyze such data with the purpose of drawing conclusion about that information. He submitted that the Special Bench of the Tribunal in the case of Global (P) Ltd has held that the business activities and functions performed by the E-Clerx for the financial year 2007-08 are not comparable to low end service providers. According to him the business activity and functions performed, E-Clerx has broadly not took for the financial year 2009 and therefore, for the relevant A.Y also the said company cannot be comparable entity. He has also submitted that there has been extra ordinary event during the financial year 2009-10 of abnormal growth as admitted by Eclerx, its in the annual report on account of various factors. Thus, according ..... X X X X Extracts X X X X X X X X Extracts X X X X
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