TMI Blog2014 (3) TMI 626X X X X Extracts X X X X X X X X Extracts X X X X ..... ormal profit working out to 113% - Relying upon Teva India (P.) Ltd. Versus Deputy Commissioner of Income-tax, Range 8(2), Mumbai [2011 (1) TMI 1210 - ITAT MUMBAI] companies showing supernormal profit cannot be treated as comparable – thus, this company cannot be treated as a comparable. Maple e-Solutions Ltd. & Tricom Corp Ltd. – Held that:- The decision in ITO v. CRM Services India (P) Ltd. Delhi [2011 (6) TMI 398 - ITAT DELHI] followed - overall profitability of the company cannot be applied in the case of the assessee as it will amount to comparing incomparable cases - In view of a question mark on the reputation of the owner, it would be unsafe to take their results for comparison of the profitability of the assessee - these two companies cannot be accepted as comparables. HCL Comnet Systems & Services Limited, Infosys BPO Limited & Wipro Limited – Held that:- The TPO has excluded the companies whose turnover is less than Rs. One Crore, on the ground that they may not be representing the industry trend - That very logic also applies to the companies having high turnover of over ₹ 200 crores as against the assessee's turnover of only ₹ 60 crores, and ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at Rs.8,29,06,660. During the relevant financial year, the assessee had the following international transactions with its AE. (a) Provision of IT enabled services Rs.56,32,13,579 (b) Provision of business support services Rs. 4,19,34,643 For computing the Arm's Length Price (ALP) of the international transaction, the assessee adopted the Transactional Net Margin Method (TNMM). In the course of assessment proceedings under S.143(3), the Assessing Officer noticing that the assessee has received payment from international transactions undertaken with its AE made a reference to the transfer Pricing Officer(TPO) under S.92CA of the Act, to determine the ALP. On receiving the reference, the TPO issued a notice under S.92CA(2) calling upon the assessee to submit the documents maintained in terms of S.92B. After receiving the compliance of the assessee, the TPO issued another letter requiring the assessee's compliance on various issues raised therein. The TPO noticed that though the assessee in its Transfer Pricing Document claimed the ITES and Business Support Services to be two separate seg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not available to perform analysis were excluded. 3. Companies that have ceased business operations or are currently inactive were excluded. 4. Companies that are undertaking different functions compared to the tax payer were excluded. 5. Companies that do not have significant ( 25%) foreign exchange earnings. 6. Companies which have been making pertinent operating losses were excluded. 7. Companies that have substantial ( 25%) transactions with related parties were excluded 8. Companies which have been in their first year of operations and have incurred operating losses and 9. Companies that are duplicated in the data base with different names or merged to form another company. 4. On the basis of the search of data base, the assessee selected 15 comparables with an average profit margin of 21.15% on cost. Therefore, the margin earned by the assessee at 15.90% on operating cost was treated as at Arm' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , overall economic development and level of competition etc. As major attributes of economic circumstances in comparability was ignored by the assessee, the department has to apply additional quantitative criteria such as export earning filters, diminishing revenue filter, etc. to make the economic circumstances comparable. (e) Most of the assessee's comparables do not stand scrutiny of FAR Analysis. The assessee has not selected on proper comparability analysis. The TPO on the basis of deficiencies pointed out as above proposed to reject to reject the TP study of the assessee and determine the ALP. The assessee objected to the proposed rejection of the TP study done by it vide its letter dated 25.6.2010 which has been summarized by the TPO as below- (i) The ALP in the case of international transaction has been determined by applying the prescribed method in accordance with sub-section (1) and (2) of S.92C of the Act. (ii) All the relevant information and the documents relating to the international transactions have been maintained as prescribed and provided to the department. (iii) The data used in the computation of ALP has been taken from widely recognised com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. Companies who have more than 25% related party transactions (sales as well as expenditure combined) of the sales were excluded Companies who have less than 25% of the revenues as export sales were excluded Companies who have distinguishing revenue/persistent losses for the period under consideration were excluded Companies having different financial year ending (i.e. not March 31, 2006) or data of the company does not fall within 12 months period i.e. 01.04.2005 to 31.03.2006, were rejected. Companies that are functionally different form that of tax payer or working in peculiar economic circumstances after giving valid reasons, were excluded By applying the aforesaid filters, the TPO selected 11 out of the 15 comparables selected by the assessee and rejected four comparables. The comparables accepted are- Sl. No. Name of the company Margin adopted by the tax payer based on multiple year data Operating margin to Cost (FY 2006-07) 1. Allsec Technologies Ltd. 26.41% 27.31% 2. Apex Advanced Technology P. Ltd. 16.96% 39.89% 3. Cosmic Global Ltd 15.72% 12.40% 4. Flextronics Software Systems Ltd. 1.81% 8.62% 5. Genesys International Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 12.40% 0 0.00% 2.72 63.55% 0 0.00% P 10 Datamatics Financial Services Ltd (Seg.) 2.92 5.07% 0.23 7.88% 2.92 100.00% 0.13 4.45% P 11 Eclerx Services Ltd. 86.12 89.33% 7.85 9.12% 79.54 92.36% 8.37 9.72% P 12 Flextronics Software Systems Ltd (See:.) 12.93 8.62% 0 0.00% 10.61 82.06% 0.11 0.85% PSeg 13 Genesys International CO\l Oration Ltd. 19.11 13.35% 1.12 5.84% 18.86 98.38% 0.13 0.68% CSeg 14 HCL Comnet Systems Services Ltd (SeR.) 260.1 8 44.99% 55.99 21.52% 260.18 100.00% 1.7 0.65% PSeg 15 ICRA Techno Analytics Ltd (SeR.) 7.23 12.24% (*)0. 17 (*) 1.85% (*) 7.7 (*) 83.64 0.02 0.28% P (Soil) 16 Informed Technologies India Ltd 4.08 35.56% 0.65 15.93% 4.08 100.00% 0.61 14.95% P 17 Infosys BPO Ltd 649.56 28.78% 48.3 7.44% 608.81 93.74% 41.49 6.39% P 18 IServices India Pvt Ltd 16.29 49.47% 0 0.0001 16.29 100.00% 02 1.23% C 19 Maple Esolutions Ltd 12.21 34.05% 0 0.00% 12.21 100.00% 0.02 0.16% P 20 Mold- Tek Technologies Ltd (Seg.) 11.4 113.49% 0.12 1.05% 11.31 99.21% (**)0. 85 7.46% P (Seg.) 21 R Systems International Ltd (Seg.) 17.34 20.18% 0.1 0.58% 17.34 100.00% 0.12 0.69% PSeg 22 Spanco Ltd (Seg.) 35 25.81 % 1.76 5.03% 35 100.00% 0.61 1.74% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is in appeal before us. 7. The assessee has raised as many as ten grounds before us. Ground No.1 is general in nature and ground No.6 is not pressed. So far as other grounds are concerned, the learned Authorised Representative for the assessee at the time of hearing as well as in his written submissions has restricted his arguments to ground No.2 and ground No.8, which respectively relates to certain comparables selected by the TPO and not taking into consideration foreign exchange fluctuation gain/loss. The submissions of the learned Authorised Representative for the assessee with regard to each of the objected comparable companies, as tabulated by the assessee in the written submissions read as follows- S. No. Company Name Reason for non-comparability and rejection Page No. of Paper-book (which was also before DRP) Case law/document relied upon 1. Accentia Technologies Ltd. (Seg). Uncomparable financial results as there is amalgamation in company in Dec. 2006 272 DRP order of Appellant for AY 2008-09. In the case of the Mold Tek also merger has taken place in Oct 2006. 2. Mold Tek Technlologies Limited Uncomparable financial results as there is merger from 1 Oct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aken, the average profit shown by them is 26%. Replying to the argument of the learned Authorised Representative for the assessee that Mold Tek Technologies Ltd. and Accentia Technologies Ltd. cannot be treated as comparables due to uncomparable financial results arising out of amalgamation. The learned Departmental Representative submitted that the fact of amalgamation was never placed before the TPO. The learned Departmental Representative submitted that the DRP's order relied upon by the assessee was for the assessment year 2008-09 and does not relate to the assessment year under dispute. However, the learned Departmental Representative submitted that the matter can go back to the TPO for examining the impact of merger on financial affairs for the assessment year under dispute. So far as the issue of functional dissimilarity of Mold Tek Technologies Ltd. is concerned, the learned Departmental Representative submitted that the observation made by the DRP in its order for the assessment year 2008-09 cannot apply to the present assessment year. Replying to the objections of the assessee in cases of HCL Comnet Systems and Services Ltd., Infosys BPO Ltd. and Wipro Ltd., the learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the company and the resulting company is known as Moldtek Plastics Limited. The de-merger from the Moldtek Technologies took place with effect from 1st April, 2007. The merger and the de-merger needed the approval of the Hon'ble High Court of Andhra Pradesh and also the approval of the shareholders. The shareholders of the company gave approval for the merger and the de-merger on 25.01.2008 and the Hon'ble High Court of Andhra Pradesh had approved the merger and de-merger on 25th July, 2008. Subsequently, the accounts of Moldtek Technologies for FY 2007-08 were revised. On a perusal of the annual report it is noticed that Teckmen Tools Pvt. Ltd. and the Plastic Division of the company were demerged and the resulting company was named as Moldtek Plastics Ltd. The KPO business remained with the company. A perusal of the Annual report revealed that to gi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany for the financial year 2007-08. The assessee has further submitted that the activity of the company is also functionally different since it is engaged in providing High End Engineering Consulting Services and Structural Engineering Consulting Services, which are in the nature of Knowledge Process Out-sourcing (KPO) services . The Authorised Representative for the assessee has submitted that the aforesaid company is providing highly technical and specialized engineering services, and use of information technology is only incidental. Lastly, it has been submitted that the company was having supernormal profit at 113%. Therefore, it cannot be taken as a comparable. In support of his contentions, learned Authorised Representative for the assessee has relied upon the orders of the DRP for the assessment year 2008-09 and the orders of the ITAT Mumbai Bench in the case of Teva India P.Ltd. v. DCIT. (2011-TII-28 ITAT- Mum-TP). 13. On careful consideration of the submissions of the assessee we find that the DRP, as already stated earlier, in the proceedings for the assessment year 2008-09 has accepted the assessee's contention that this company cannot be treated as comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, we accept the contention of the assessee that this company cannot be taken as a comparable both for the reasons that it was having supernormal profit and it is engaged in providing KPO services, which is distinct from the nature of services provided by the assessee. IV. Coral Hub Limited (Earlier known as Vishal Information Technologies Ltd.): 16. The assessee has objected for this company being taken as comparable mainly on the ground that the activities of the company is not only functionally different, but the business model of the company is also different as it sub-contracts majority of its ITES works to third party vendors and has also made significant payments to those vendors. The payments made to vendors towards the data entry charges also supports the fact that the company outsources its works. In the circumstances, it cannot be taken as a comparable to the ITES functions performed by the assessee. Since this company is acting as agent only by outsourcing its works to the third party vendors. In this context, the assessee relied upon the order of the DRP in assessee's own case for the assessment year 2008-09, wherein the DRP, after taking into consideration, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n as comparable in the cited case also, cannot be accepted as comparables, with the following observations. 17.5 We have considered the facts of the case and submissions made before us. The admitted facts in respect of Galaxy Commercial are that it is carrying on three lines of business and segment profitability is not available. Obviously, overall profitability of the company cannot be applied in the case of the assessee as it will amount to comparing incomparable cases. Further, the business reputation of Rastogi group, owning Maple E. Solutions and Triton Corporation, is under serious indictment. They are also carrying on the business of data processing services and ITES services apart form BPO services. In view of a question mark on the reputation of the owner, albeit for earlier years, it would be unsafe to take their results for comparison of the profitability of the assessee. .. Accordingly, it is held that none of these cases can be taken to be comparable case. It was submitted by the learned Authorised Representative for the assessee that since the above decision of the Delhi Bench of the Tribunal was delivered subsequent to the impugned order of the DRP, it could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 representing the industry trend. That very logic also applies to the companies having high turnover of over Rs.200 crores as against the assessee's turnover of only Rs. 60 crores, and therefore, it would be fair enough to exclude those companies also. In the case of Agnity India Technologies P. Ltd. (supra), the Delhi Bench of the Tribunal, while considering the comparability with companies which are market leaders in their field, and having substantially high turnover, observed as follows- 5.2.Various arguments, as stated earlier, were taken before the DRP which inter-alia included rejection of comparable cases; application of arbitrary filter of wage to sales ratio; ignoring that the assessee is a limited risk company; inclusion of Infosys Technologies ltd.; and inclusion of Satyam Computers Services Ltd. in spite of the fact that its data is not reliable as publicly known. On the basis of these arguments, the DRP excluded the case of Satyam Computers Services Ltd., thereby reducing the arm's length margin to 25.6%. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anies 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 companies which also have turnover of 1.00 to 200.00 crores only should be taken into consideration for the purpose of making TP study. In view of the aforesaid consistent decisions of the Tribunal, we accept the contention of the learned Authorised Representative for the assessee that the aforesaid three companies cannot be treated as comparable, considering their substantially high turnover as compared to that of the assessee. We also agree that the turnover filter of Rs. 1 crore to Rs. 200 crore as applied by the ITAT Bangalore Bench in the aforesaid decision, should also apply to the facts of the present case, considering the assessee's turnover of mere Rs. 60 crores. We therefor4e, hold that companies having turnover of Rs. 1 crore to Rs. 200 crore alone can be considered as comparable, in the case of the assessee. 22. We find from the orders of the DRP that though the assessee has made detailed arguments, specifically objecting to the selection of the aforesaid companies as comparables, the DRP has not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. v. Asstt. CIT .(2010) 6 ITR 81 and the order of the Hyderabad Bench of the Tribunal in the case of Four Soft Ltd. v. Dy. CIT [IT Appeal No. 1495 (Hyd.) of 2010, dated 9-9-2011]. 26. The learned Departmental Representative on the other hand, supported the orders of the lower authorities. 27. We have considered the submissions of the parties in this regard. The Bangalore Bench of the Tribunal in the case of SAP Labs India P. Ltd. (supra), while considering a dispute of similar nature, observed as follows- The foreign exchange fluctuation gains is nothing but an integral part of the sales proceeds of an assessee carrying on export business. The Courts and Tribunals have held that foreign exchange fluctuation gains form part of the sale proceeds of exporter-assessee. The foreign exchange fluctuations income cannot be excluded from the computation of the operating margin of the assessee company . Following the aforesaid decision of the Bangalore Bench of the Tribunal, the Hyderabad Bench of the Tribunal held in the case of Four Soft Ltd. (supra) in the following manner- 16. With regard to the exclusion of gain on account of foreign exchange fluctuation while co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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