TMI Blog2016 (3) TMI 1431X X X X Extracts X X X X X X X X Extracts X X X X ..... fines arm s length price to mean a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions. To compute ALP the results of the international transaction are bench marked against comparable uncontrolled transaction. The mandate of s. 92F(ii) is that ALP shall be computed considering price applied or proposed to be applied in transactions between non- AE s. When selection of external comparables, one needs to ensure that such external comparables are uncontrolled. The companies having controlled transactions therefore needs to be eliminated. Then the issue that crops up is what should be the related party transaction ratio for excluding as comparable. This issue had come up before the Tribunal in numerous cases. The Delhi Coordinate Bench in the case of M/s Sony India Pvt. Ltd [ 2008 (9) TMI 420 - ITAT DELHI-H ], held that the companies having relating party transactions of not exceeding 15% can be taken as a comparable. The law is fairly well settled to the extent that the companies having in related party transactions more than 15% cannot be considered as comparable. Accordingly, we are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 43(3) of the Income-tax Act, 1961 ('the Act') and the order passed by the Commissioner of Income-tax (Appeals)-IV, ('the CIT(A)') under section 250 of the Act, are bad on facts and in law, and is in violation of principles of natural justice. b) The CIT(A) erred in law in not appreciating the meaning of the erstwhile phrase 'having regard to' in sections 92 and 92CA(4) of the Act. c) The CIT(A) erred in law in confirming that the amendment made to section 92CA(4) ride the Finance Act, 2007 was to set right the lacuna in the said section. 2. The fresh comparable search undertaken by the TPO is bad in law a) The CIT(A) erred in determining a transfer pricing adjustment to Information Technology (`IT') Enabled services, by substituting the TPO's arm's length price and not that determined by the Appellant. b) The C1T(A) erred in rejecting the value of international transaction as recorded in the books of account, as the arm's length price. c) The CIT(A) erred in law in holding that the fresh comparability analysis using non-contemporaneous data conducted by the TPO and further substituting the Appellant's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fferences in (a) accounting practices, (b) marketing expenditure, (c) research and development expenditure and (d) risk profile between the Appellant and the comparable companies. b) The AO/TPO erred in law and on facts in not allowing appropriate adjustment for the specific non-operating costs incurred by the Appellant (during FY 2004-05. 6 Interest levied under section 234B of the Act The CIT (A) has erred in confirming consequential interest under section 2348 of the Act amounting to ₹ 394,163. 7 Interest under section 234D The CIT (A) has erred in confirming, interest under section 234D of the Act amounting to ₹ 383,684. 8 Initiation of Penalty Proceedings The learned CIT (A) has erred in confirming the initiation of penalty proceedings under section 271(1)(c) of the Act. 9 Relief a) The Appellant prays that directions be given to grant all such relief arising from the above grounds and also all relief consequential thereto. b) The Appellant craves leave to add to or alter, by deletion, substitution or otherwise, the above grounds of appeal, at any time before or during the hearing of the appeal. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 16,60,433/- 4.3 The assessee-company sought to justify consideration received for the international transactions entered with its AE to be at arm s length price [ALP]. The assessee-company had also submitted transfer pricing study report adopting the operating profit on cost (OP/TC) as a profit level indicator for the transfer pricing study. The assessee-company applied Transactional Net Margin Method [TNMM] which was considered to be the most appropriate method for purposes of bench marking the international transactions. The assesseecompany s profit margin was computed at 8.82% and the assessee-company claimed that the same was comparable with other companies rendering the IT Enabled Services (ITES). For the purpose of transfer pricing study, the company had chosen 9 comparable entities and arithmetic average of operating profit margins of said comparables was computed at 7.46%. According to the assessee-company, its PLI was within the acceptable range as indicated under second proviso to sec.92C. The assessee-company had chosen the following 9 entities as comparables whose average profit margin was computed at 7.46%. Sl. No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any not available for the 12 month period i.e. 01/04/2005 to 31/03/2006 were excluded. 5.1 The TPO finally selected the following comparables: Sl. No. Company Name Operating margin on cost Adj. Margin 1 Allsec Technologies Ltd. 29.85 26.81% 2 Safron Global Ltd. 24.88 20.61% 3 Vishal Information Tech Ltd 45.62 36.75% 4 Cosmic Global Ltd (Tulsyan Tech Ltd) 17.02 12.55% 5 Transworks Information Services Ltd. 2.81 0.02% 6 Wipro BPO Solution Ltd. 18.59 15.51% 7 Ace Software Exports Ltd. 14.5 11.75% 8 Nucleus Netsoft GIS Ltd. 40.06 37.02% 9 Maple E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arability of Netvista Information Solutions Ltd., was rejected. The comparables viz. Online Media Solutions Ltd., and R T Outsourcing Services Ltd., were also rejected by the ld.CIT(A) as the foreign exchange earnings does not exceed 25% of the total revenue. 6.2 As regards the comparables selected by the TPO, the ld.CIT(A) rejected the Maple e-Solutions on the ground that the operations are available only for a period of 4 months and it does not pass through the filters applied by the TPO. As regards Nucleus Netsoft Technologies Ltd., it was rejected by the ld.CIT(A) on the ground that no segmental data was available. In respect of Vishal Information Technolgies Ltd., this company was retained by the ld.CIT(A) holding that it does not make a difference whether the payment is made in the name of salary or data entry charges and also relied on the decision of co-ordinate bench (Hyderabad) in the case of M/s.Deloitte Consulting India Pvt. Ltd. In ITA NOs.1082 1084/Hyd/2010. As regards Saffron Global Ltd., it was retained by the ld.CIT(A) rejecting the contention of the assessee-company that the financial data is not available on the public domain at the time of TP study. After t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. Brigade Global Services Pvt. Ltd v ITO (2013) 33 taxmann.com 618 (Hyd); 8. M/s.Capital IQ Information Systems (India) Private Ltd ITA No. 1961/Hyd/2011; 9. Stream International Services Pvt Ltd v ADIT ITA. No 8997/Mum/2010 10. M/s. First Advantage Offshore Services Pvt Ltd ITA No. IT(TP)A No. 1086/Bang/2011. 11. DCIT v Genisys Integrating Systems (India) P Ltd ITA No. 869/B/2013 for AY 2005-06 8.1 On the other hand, ld.DR submitted that that this comparable has passed through all the filters adopted by the TPO and therefore, should be included in the list of comparables. 8.2 We heard the rival submissions and perused material on record. This comparable is selected by the TPO. The assessee-company objected for inclusion of this company on the ground that the business model is different as it outsourced major portion of the work and the employees cost is merely 0.9% of the revenue and showing abnormal profit of 45.62%. The ld.CIT(A) had not concurred with the views of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In our view, the Tribunal erred in holding that the functions performed by the assessee were broadly similar to that of eClerx or Vishal. The operating margin of eClerx, thus, could not be included to arrive at an arm's length price of controlled transactions, which were materially different in its content and value. In Maersk Global Centers (India) Pvt. Ltd. (supra), the Special Bench of the Tribunal had noted the same and had, thus, excluded eClerx as a comparable. It is further observed that the comparability of eClerx had also been examined by the Hyderabad Bench of the Tribunal in Capital Iq Information Systems (India) (P.) Ltd. v. Addl. CIT (supra), wherein the Tribunal directed the exclusion of eClerx as a comparable for the reason that it was engaged in providing knowledge process outsourcing services and further that it had also returned supernormal profits. 38. In our view, even Vishal could not be considered as a comparable, as admittedly, its business model was completely different. Admittedly, Vishal's expenditure on employment cost during the relevant period was a small fraction of the proportionate cost incurred by the assessee, apparently, for the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Corporation and the accumulated losses are more than 50% of net worth, the internal controls require to be improved and increase in turnover is not a relevant factor for excluding this company as a comparable. These factors have no impact either on the comparability or profitability of the current year and therefore, we uphold the findings of the ld.CIT(A) and this ground of appeal filed by the assesseecompany is dismissed. 10. The other grounds of appeal are neither pressed before us nor considered necessary for adjudication. 11. In the result, the appeal of the assessee-company is partly allowed. 12. Now, we shall take up the revenue s appeal viz. IT(TP)A No.30/Bang/2012. The revenue is aggrieved by the direction of the ld.CIT(A) that the companies viz., Allsec Technologies, Transworks Information, Wipro BPO and Ace Software are not comparable as they have related party transaction. The ld.CIT(A) directed that only companies having no related party transactions should alone be considered as comparable. 12.1 Ld.CIT-DR submitted that it is fairly settled law that the companies having RPT less than 15% can be considered as comparable. The learned AR of the assessee-com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arty transactions more than 15% cannot be considered as comparable. Accordingly, we are of the opinion that the ld.CIT(A) was not justified in holding that only the companies having no RPT should alone be considered. Therefore, we hold that Allsec Technologies, Transworks Information and Ace Software can be considered as comparable. However, Wipro BPO cannot be considered as a comparable on account of fact that it is substantial intangibles and enjoying huge goodwill. This comparable was considered by the co-ordinate bench in the case of DCIT vs. M/s.Akamai Technologies India Pvt.Ltd in IT(TP)A No.879/Bang/2013 wherein it has been held as follows: 10.1 We heard the rival submissions and perused the material on record. The Hon ble Bombay High Court in the case of CIT vs.Pentair Water India Pvt. Ltd. (381 ITR 216) had held that the turnover was a relevant factor for the purpose of comparability of two entities. However, without going into this issue, as rightly submitted by the learned AR of the respondent-assessee-company, it was held by the co-ordinate benches of Hyderabad and Mumbai benches in the cases cited supra, Wipro BPO Solutions Ltd., cannot be considered as a comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X
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