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TMI Blog2014 (8) TMI 871X X X X Extracts X X X X X X X X Extracts X X X X ..... sment 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 assessment year was Rs. 12.57 crores. 3. 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. Transaction Net Margin Method (TNMM) was adopted as most appropriate method in the TP study to determine the ALP. Search was conducted in the data bases to select comparable companies by selecting the operating margin i.e. operating profit/operating cost as the profit level indicator (PLI). The searc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18 43.85% 7. Eclerx Services Ltd., 86.12 85.99% 8. Asit C. Mehta Financial Services Ltd., 6.09 22.54% 9. Informed Technologies Healthstreet India Ltd., 4.08 34.60% 10. Appollo Ltd., 47.84 -21.20% 11. Datamatics Financial Services Ltd., (Seg.) 2.92 -0.75% 12. Flextronics Software Systems Ltd., (Seg.) 12.93 5.81% 13. Genesys International Corporation Ltd., 19.17 8.30% 14. Nittany Outsourcing 23.23 10.28% 15. Aditya Birla Minacs Worldwide Ltd., 197.06 10.78% 16. Cosmic Global Ltd., 4.28 11.11% 17. ICRA Techno Analytics Ltd., (Seg.) 7.23 11.18% 18. Apex Knowledge Solutions P. Ltd., 6.64 12.80% 19. R Systems International Ltd., (Seg.) 17.34 18.08% 20. Spanco Ltd., (Seg.) 35.00 19.40% 21. Caliber Point Business Solutions Ltd., 39.30 19.97% 22. Allsec Technologies Ltd., 113.28 25.47% 23. Bodhtree Consulting Ltd., (Seg.) 2.94 29.36% 24. Accurate Data Converter 4.33 47.96% 25. IServices India P. Ltd., 16.29 48.39% 26. Maple Esolutions Ltd., 12.21 29.99% 27. Triton Corp. Ltd., 53.37 27.42% 27.51% 6. In pursuance to the order passed by the TPO proposing the aforesa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted before us that income of the assessee is exempt under s. 10A of the Act and, therefore, the overpricing or underpricing of an international transaction would not affect the computation of income. This argument is without force in view of the specific provisions contained in the first proviso to sub-s. (4) of s. 92C wherein it has been clearly stated that no deduction under s. 10A/10AA or s. 10B or under Chapter VI-A shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under this section. 21. It is abundantly clear that legislature while introducing the enactment did comprehend a situation requiring investigation and addition on account of computation of ALP in cases of the assessee entitled to benefit under s. 10A/10AA or s. 10B of the Act. In the light of specific provision, it is difficult to contend that arms' length prices cannot be determined under s. 92C or 92CA where assessee is entitled to benefit of above sections. 22. In the light of above discussion, we hold that although ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee take their objections and consider whether the above two companies can be included as comparables. 12.2 Accentia Technologies Limited The assessee is objecting to the aforesaid company being treated as comparable since the aforesaid company is functionally different from the assessee as more than 64% of the operating cost of the company is towards overseas business expenses. Further the company has substantial marketing expenses which was almost 29% of its sales as compared to almost nil of the assessee. It is also submitted that due to multiple acquisitions by the company during the year under dispute, it was an exceptional year impacting the profitability of the company. In this connection assessee relied on the decision of Income-tax Appellate Tribunal, Hyderabad Bench in case of Capital IQ Information Systems India Pvt. Ltd. (ITA No. 1961/Hyd/2011), Zavata India Pvt. Ltd, Hyderabad vs. Assessee, ITA. No. 1781/Hyd/2011 and [2014] 41 taxmann.com 334 ,Avineon India (P.) Ltd. v. Deputy Commissioner of Income-tax, Circle-I (1). 12.2.1 In case of Capital IQ Information Systems (India) (P.) Ltd. (supra) the co-ordinate bench of the Hyd. IT AT while considering the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear and it was all exceptional year of performance as financial statements were revised by this company much after the closure of the previous year. The Panel agrees with the contention of the assessee that it is an exceptional year having significant impact on the profitability arising out of merger and demerger." On careful consideration of the matter, we also agree with the aforesaid view of the DRP that extra-ordinary event like merger and de-merger will have an effect on the profitability of the company in the financial year in which such event takes place. It is the contention of the assessee that in case of the aforesaid company, there is amalgamation in December, 2006, which has impacted the financial result. This fact has to be verified by the TPQ. If it is found upon such verification that the amalgamation in fact has taken place, then the aforesaid comparable has to be excluded.' As can be seen from the order of the co-ordinate bench, the aforesaid company was directed to be excluded since ex-ordinary events like merger and demerger had taken during the relevant financial year which must have impacted the financial results of the company. That besides the high volu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the final list of comparables." In case of Asstt. CIT v. Maersk Global service Centre (India) (P.) Ltd. (Supra) the ITAT Mumbai Bench has also directed for exclusion of the aforesaid company, by observing in the following manner - "Insofar as the cases (Tulsyan Technologies Limited and Vishal Information Technologies Limited are concerned, it is noticed from their annual accounts that these companies outsourced a considerable portion of their business. As the assessee carried out entire operations by itself, in our considered opinion, these two cases were rightly excluded." In view of the observations made by the DRP as well as the decisions of the ITAT, we accept that this company cannot be taken as a comparable. 12.5 Eclerx Services Limited Assessee submitted that this company is engaged in providing knowledge process outsourcing (KPO). It was submitted that the assessee is providing data analytics, operations management and audit reconciliation. It was further submitted that besides being functionally different from the assessee, the aforesaid company has shown extraordinarily high profit at 88.11 % hence cannot be tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the basis of FAR analysis to show that the selection of Ms. 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 Pvt. Ltd., (ITA.NO.5043/Del/2000 dtd 21.01.2011) + (2011-TII-13-ITAT-DEL-TP), Delhi Bench of ITAT has held that exclusion of comparables showing supernormal profits as compared to other comparable is fully justified. We, therefore set aside the impugned order of the ld. CIT(A) on this issue and restore the matter to the file of the A.O. with a direction to decide the same afresh after taking into consideration the submissions made by the assessee before the learned CIT(A) and keeping in view the Delhi Bench of ITAT in the case of Abode Systems India Pvt. Ltd. (supra)." In this view of the above, we accept the contentions of the assessee that this company cannot be treated as a comparable. 12.7 HCL Comnet Systems & Services Limited, Infosys BPO Limited and Wipro Limited. - While the assessee's turnover during the year was about 12.5 crores, these companies have huge turnovers compared t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y limited currency risk. Having considered these points, we are of the view that the case of the aforesaid Infosys and the assessee are not comparable at all as seen from the financial data etc. of the two companies mentioned earlier in the order. Therefore, we are of the view that this case is required to be excluded." Similar view has also been expressed by the Hyderabad Bench of the Tribunal in the case of Trinity Advanced Labs P. Ltd. (supra). In the case of M/s. Genesys Integrating India P. Ltd. (supra), the Bangalore Bench of the Tribunal has observed in the following manner - "9. Having heard both the parties and having considered the rival contentions and also the juridical precedents on the issue, we find that the TPO himself has rejected the companies which are making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are liable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut of the list of comparables. In this regard, we may refer to the decision of the ITAT Bangalore Bench in the case of First Advantage Offshore Services (P.) Ltd. v. Dy. CIT [2012] 53 SOT 89, wherein it was observed as under:- "39. Having heard both the parties and having considered their rival contentions, we find that the assessee had raised elaborate objections to each of the comparables in group 3 before the TPO. The TPO has also reproduced the said objection in his order para 6.5.1. of page 178 of his order. He has rejected the contention of the assessee by holding that every function within BPO sector can be from low end to high end and the activities of the assessee such as accounting, web management, network management are BPO services using technology but these services are not categorized as KPO. He held that a call centre may offer support services like telemarketing to high end services like technical support services, where not only the level of knowledge, skill required would be high, hut the technical knowledge as well would he high. According to him, hack office transaction process services may he a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 33 lacs towards the unutilized floor space including 10893 square feet acquired in new block for future expansion. This issue was explained to the DRP in writing but the DRP and the TPO have not dealt with is in an appropriate manner and have merely rejected the claim without verifying it. We therefore direct the TPO/AO to give opportunity to assessee and consider the objections on the issue. 14. TPO/AO is directed to re-workout the TP adjustment as per the provisions after excluding the comparables rejected above and considering the comparables which require reconsideration after giving opportunity to assessee. AO/TPO is also directed to consider the cost issue as directed in para 12 above. With these directions the ground 2 is considered partly allowed for statistical purposes. 15. Ground no .3 Relating to Section 10A In this ground, assessee has challenged the reduction of communication charges from the export turnover without reducing it from the total turnover while computing deduction u/s 10A of the Act. This issue is squarely covered in favour of the assessee by the judgment of Hon'ble Bombay High Court in case of CIT v. Gem Plus Jewellery Ltd. [2011] 330 ITR 175 an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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