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TMI Blog2013 (6) TMI 405X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act in respect of the profits of the STPI unit. Initially, the return filed by the assessee was processed u/s 143(1) of the Act. Subsequently, however, the assessee's case was selected for scrutiny assessment. In course of scrutiny assessment proceedings, the Assessing Officer noticing that the assessee has entered into international transaction with its AE made a reference to the Addl. CIT (Transfer Pricing), Hyderabad (hereinafter called the TPO) for determining the Arms' Length Price (ALP). The revenue earned by the assessee from the International transaction of providing back office support services to its AE during the financial year relevant to the assessment year under dispute was Rs. 25,54,45,590/-. In course of the proceeding before the TPO, the assessee submitted a TP study conducted by an independent external consultant after undertaking a detailed analysis for determining the functions performed, risks assumed and asset utilised by the assessee and its AE in respect of the international transactions between them. As per the functional analysis, the assessee was categorised as a risk mitigated contract service provider and selected as a tested party. Transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the communication charges of Rs. 1,16,73,252/- from the export turnover for the purpose of computing deduction u/s 10A of the Act. The assessee objected to the draft assessment order before the DRP. The DRP rejected the assessee's contention with regard to almost all the issues excepting assessee's objection with regard to two comparables selected by TPO i.e. Maple E Solutions Limited and Triton Corp Limited, which were directed to be excluded from the list of comparables. In pursuance to the aforesaid direction of the DRP, final assessment order was passed by the Assessing Officer computing the total income at Rs. 2,62,23,241/-. Being aggrieved, the assessee has filed the present appeal before us raising as many as 14 grounds. 5. Grounds Nos.1 to 11 are on transfer pricing issues. At the outset, the ld AR expressed his intention to press ground No.6 (b) and ground No.7 only. In view of such submissions of the learned AR, the rest of the grounds on transfer pricing issues are dismissed as not pressed. So far as ground Nos.6 (b) and 7 are concerned, the learned authorised representative of the assessee confined his submission to selection of certain companies as comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... echnologies amalgamated with M/s Accentia Technologies Limited which resulted in a higher profit for the company during the year. In case of Capital IQ Information Systems India Pvt. Ltd., the co-ordinate bench of this Tribunal while considering the assessee's objection with regard to the aforesaid company held in the following manner:- "10. It is the submission of the assessee that this company cannot be treated as a comparable because of uncomparable financial results arising out of amalgamation in the company. In this regard, the assessee has relied upon the order of the DRP for the assessment year 2008-09 in assessee's own case. It is seen that the DRP while considering similar objection placed by the assessee in the case of another company, viz. Mold Tek Technologies Ltd., in the proceedings relating to the assessment year 2008-09, has observed in the following manner- "17.5. In addition to the above, the Director's Report of the company for the FY 2007-08 revealed the merger and the demerger. A company known as Techmen Tools Pvt. Ltd. had amalgamated with Mold-tek Technologies Ltd. with effect form 1st October, 2006. There was a de-merger of Plastic Division of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evant financial year which must have impacted the financial results of the company. That besides the high volume of on-site operation of Accentia Technologies Limited also makes it functionally dissimilar to the assessee. These facts are not all considered either by the TPO or by the DRP. We therefore remit the matter to the file of the Assessing Officer who shall verify the fact whether actually merger has taken place during the year and if it found so, then the aforesaid company has to be excluded from the list of comparables. The Assessing Officer should also properly consider assessee's submissions with regard to functional difference also. Accurate Data Convertors Private Ltd. 11. The learned authorised representative of the assessee objecting to the aforesaid company being treated as comparable submitted that this company was not identified in the search process either by the assessee or by the TPO. It was submitted that no opportunity was given to the assessee to examine whether these companies are comparable to the assessee. It was submitted that the TPO relying upon unaudited information has treated the aforesaid company as comparable only because the high margin of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company as comparables. The learned authorised representative of the assessee also relied upon the observation made by the Income-tax Appellate Tribunal, Hyderabad Bench with regard to aforesaid company in case of Capital IQ Information Systems (India) Pvt. Ltd. 15. The learned departmental representative however supported the orders of the DRP and TPO. 16. We have heard rival submissions and perused the material on record. In case of Capital IQ Information Systems (India) Pvt. Ltd.,(supra) the co-ordinate bench after considering the objections of the assessee in respect of the aforesaid company held in the following manner:- "17. After considering the submissions of the learned Authorised Representative for the assessee, we find that the DRP, in the proceedings for the assessment year 2008-09 in assessee's own case, after taking note of the composition of the vendor payments of Coral Hub for the last three years, and the fact that it has also commenced a new line of business of Printing on Demand(POD), wherein it prints upon clients request, concluded as follows- "18.4. In view of this major difference in functionality and the business model, this Panel is of the view that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xcluded this company which has not been controverted by the ld. Departmental representative. Therefore, considering the totality of facts and the circumstances, we direct the exclusion of the aforesaid company from the list of comparables. Bodhtree Consulting Limited:- 21. With regard to the aforesaid company, the learned authorised representative of the assessee submitted that the company is functionally different as it is into software services and provide services using the developed products. It was further submitted that in the information submitted in response to the letter issued u/s 133(6) of the Act, it has submitted that the company has developed a software tool used for providing data cleansing services and it involves an element of software development. The company is also engaged in providing e- paper solutions. It was further submitted that the annual report of the company also reveals that it has only software development segment. It was further submitted that the company has undergone re-organisation and cross booking of expenses unlike previous year which has impacted the profitability. It was submitted that un-audited segmental information has been used to ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed Technologies India Limited, it was submitted that the company had shown operating losses of (-)72.98% and (-) 43.96% in the financial year 2004-05 and 2005-06. Whereas during the year under dispute, it has shown operating margin of 35.56% which indicates that this has been an year of exceptional operations. So far as Iservices India Private Ltd., is concerned, the learned authorised representative of the assessee submitted that the margin of the company is more than one and half times the arithmetic mean of the comparable companies selected by the TPO. It was further submitted that the company is a private limited company with no information for the prior and future years to evaluate trend is available. 27. The learned departmental representative however strongly supporting the orders of the revenue authorities submitted that the assessee has not raised any objection with regard to the aforesaid companies being treated as comparable either before the TPO or before the DRP. Hence, assessee's contention should not be entertained. 28. We have considered the submissions of the parties with regard to the aforesaid two companies and perused the material on record. On going throu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eedings for the assessment year 2008-09 has accepted the assessee's contention that this company cannot be treated as comparable because of exceptional financial result due to merger/de-merger. In view of the aforesaid, we accept the assessee's contention that this company cannot be treated as comparable. That apart, it is also a fact that this company has shown super normal profit working out to 113%. The Income-tax Appellate Tribunal, Mumbai Bench in the case of Teva India Pvt. Ltd.(supra) has observed that companies showing supernormal profit cannot be treated as comparable. The relevant observations of the Tribunal in that case are extracted hereunder for convenience- "32. We have heard the arguments of both the sides and also perused 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 M/s. 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 P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent as the company owns significant intangibles and hence enjoys premium pricing. It was submitted that 28% of the BPO revenue is from product engineering services. It was further submitted that, manually corrected and unaudited data from its TP report has been considered which cannot be said to be authentic. In support of his contention for excluding the aforesaid three companies as comparables, the learned authorised representative of the assessee relied upon the decision of Capital IQ Information Systems India Ltd. (supra). 33. We have heard rival submissions of the parties and perused the material on record. It is not disputed that these three companies are having huge turnovers compared to the assessee's turnover of Rs. 25.54 crores during the year. The co-ordinate bench of the Tribunal in case of Capital IQ Information Systems India Ltd. while considering the issue of selection of comparable companies by applying turnover filter has held as under:- "21. On considering the submissions of the assessee in relation to these three companies, we find that the TPO has excluded the companies whose turnover is less than Rs.One Crore, on the ground that they may not be represent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain for the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal when companies which are loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun & Bradstreet and NASSCOM has given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun & Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs. 1.00 crore to 200 crores have to be taken as a particular range and the assessee being in the range having turnover of 8.15 crores, the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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