TaxTMI 
TaxTMI 
2014 (9) TMI 192
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....ommissioner of Income Tax had erred in referring the matter to the learned TPO u/s 92CA of the Act on the following amongst other grounds, rendering the order of the TPO as unsustainable both in law and on facts: (a) As none of the conditions precedent laid down under section 92C(3) of the Act were satisfied, there was no occasion for determination of arm's length price by the AO and the value of the international transactions ought to have been accepted; (b) As the reference made by the learned AO to the learned TPO is not in accordance with the provisions of Section 92CA(1) of the Act; (c) As no opportunity of being heard was granted at any stage of the proceedings for this purpose, either at the stage of proposal or even at the stage of approval; (d) As no initial opinion was formed u/s 92C(3) of the Act which is a jurisdictional precondition; (e) By not furnishing the Letter of Reference ('LOR') to appellant. 4. That the learned Dispute Resolution Panel has failed to appreciate that adjustment proposed by the lea....
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....hat on facts and in law, the Hon'ble DRP and learned TPO/AO have cherry picked comparables to accomplish pre-conceived conclusions, with the sole objective of rejecting comparables selected by the appellant and arriving at skewed results. 5.7 That on facts and in law, the Hon'ble DRP has erred in rejecting comparable company namely CG Vak Software & Exports Limited on account of having significant related party transactions without appreciating the fact that the Appellant has considered consolidated financial statement which nullify the effect of related party transactions at the standalone level. 5.8 That on facts and in law, the Hon'ble DRP has erred in applying the filter of rejection of Ace Software Exports Limited showing declining revenue trends. 5.9 That on facts and in law, the Hon'ble DRP and learned TPO/AO have failed to make appropriate adjustments to account for varying risk profiles of the Appellant vis-à-vis the comparables and in the process also neglected the Indian transfer pricing regulations, OECD guidelines on transfer pricing and judicial precedence. &nbs....
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....see Company, M/s Techbooks International Pvt. Ltd. was incorporated on 12.6.2000 under the Companies Act, 1956. It is a wholly owned subsidiary of Aptara, Inc., USA., engaged in the business of provision of data conversion, data entry or keyboarding, reformatting and typesetting services, which was exported only to Aptara Inc, USA, i.e. its holding company. Apart from the above, the Assessee Company had no other business activity during the year under consideration, i.e., A.Y. 2007-08. To carry out the said activity, the Assessee Company had a 100% Export Oriented Undertaking or EOU (hereinafter referred to as 'the Undertaking') registered with the Software Technology Park of India. The income derived by the Assessee from the Undertaking is eligible for deduction under section 10B of the Income Tax Act, 1961 (hereinafter referred to as 'the Act'). The assessment year under consideration is the sixth year of the claim of deduction under section 10B of the Act; (ii) On 31.10.2007, the Assessee Company filed its return of income for the assessment year under consideration, declaring a total income of Rs. 59,93,597/-. In the computation of total income, income from expo....
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....of operating margins between 15.43% and 27.58% on operating cost (APB 79), the margin of profit declared by the Assessee at 15.58% was at arm's length. The comparables selected by the Assessee are as follows: S.No. Particulars 3 years' data as per Transfer Pricing Study without capital adjustment 3 years' latest data available in the public domain without working capital adjustment Using latest contemporaneous data (FY 2006-07) available in the public domain without working capital adjustment 1. Ace Software Exports Limited 11.88% 5.59% -7.04% 2. Allsec Technologies Ltd 27.47% 27.47% 27.21% 3. Apex Advanced Technology Private Limited 17.44% 26.95% 39.73% 4. BNR Udyog Ltd. NC* NC* NC* 5. CG Vak Software & Exports Limited 4.48% 4.48% 4.97% 6. Cosmic Global Ltd 17.49% 14.56% 11.31% 7. Flextronics Software Systems Ltd. 3.61% 3.61% -0.89% 8. Fortune Infotech Ltd. NC* NC* NC* 9. Genesys International Corporation Ltd. -1.29% 3.59% 12.52% 10. Maple eSolutions Ltd. 36.64% 35.08% 33.96% 11. R Systems International Ltd. 1....
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....Software Systems Ltd. and Transworks Information Services Ltd. were disregarded. Two companies, i.e., BNR Udyog Ltd. and Fortune Infotech Ltd. were rejected for having related party transactions. Further, the TPO took CG Vak Software and Exports Ltd. as a comparable and computed the margin at 23.29% and made an adjustment of Rs. 7,08,27,120/-; (ix) The AO, vide his Draft Order dated 22.12.2010, relying on the TP analysis undertaken by the TPO, determined the ALP of the international transaction of the Assessee to be far greater than the ALP determined by the Assessee. This resulted in determination of income of the Assessee at Rs. 7,68,20,717/-; (x) Aggrieved against the aforesaid Draft Order of the AO, the Assessee filed its Objections before the Dispute Resolution Panel (DRP). A copy thereof has been placed at APB 154 to 251; (xi) The DRP, vide Order dated 30.08.2011 (APB 252 to 281), allowed working capital adjustment. The margin was computed at 21.41%, as against that of 21.51% computed in the TP study of the Assessee. However, the DRP did not allow the benefit of -5% to the assessee under the Proviso to section 92C(2) of the Act. Apropos the comparables, out of the 15 comparab....
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.... nor the OECD Guidelines provide the revenue trend to be a determinant of comparability; that otherwise too, in the Assessee's case, the Assessee had extracted data of Ace Software for the earlier three years from the 'moneycontrol' website, from which data, it was observed that there was an average annual decrease of 11.67%, which might have been due to adverse business conditions existing at that time; that also, Ace Software was found not to have been making losses in any of these three years; that both these Companies had been originally considered by the TPO in his set of comparables; that the DRP illegally rejected these comparables without giving any notice; that the DRP has failed to consider that if both CG Vak and Ace Software are considered as comparable, the Assessee's transfer price would be within arm's length; REGARDING VISHAL INFORMATION that the DRP has made an erroneous selection of M/s Vishal Information Technologies Ltd., which had been rightly rejected by the Assessee as a comparable, on the alleged basis that it was a Company which was functionally comparable to the Assessee Company, whereas it was not; that though this Company had been s....
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.... and that the DRP has failed to consider that the Assessee does not undertake risks like market risk, contract risk, credit and collection risk and risk of infringement of intellectual property etc., due to which fact, benefit of the same vis-a-vis the comparables ought to have been allowed to the Assessee. 8. Lastly, the Assessee has argued that the addition made is wholly untenable, since it has been made and confirmed, erroneously overlooking the fact that entire income of the Assessee is exempt u/s 10B of the Act and as such, there could have been no justification for the Assessee to retain profits out of the country. 9. On the other hand, on behalf of the Department, strong reliance has been placed on the orders of the Authorities below. It has been contended in the arguments addressed and in the Written Submissions filed, that with regard to safe harbour, it is pointed out that law has been amended, and the issue is conclusively settled in favour of Revenue; that in fact, the same has been held so by the ITAT, Special Bench, Delhi in the case 'IHG IT Services (India) (P.) Ltd. v. vide order dated 30.04.2013, in ITA No. 5890/D/2010,, that the assessee's operating mar....
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....h regard to risk analysis, reliance is placed on the order of the DRP; that the argument that the assessee's income was exempt from tax, and that it had no motive for tax evasion is not relevant in a transfer pricing situation; that reliance is placed on the following orders: - * ITO vs. Tianjin Tianshi India (P) Ltd. - 2011 -64-DTR 98, 133 lTD 123 Delhi Tribunal Establishment of motive of tax evasion, is not required before invoking TP provisions. Aztech Special Bench order, 107 ITO 141, Bangalore sB, paras 127 till 129. * Coca Cola India {P} Ltd. 309 ITR 194{ Hon'ble P&H High Court). * Haworth India (P) Ltd. 131 ITO 215, Delhi * Dy. CIT v. Indo American Jewellery Ltd. [2010] 41 SOT 1 (Mum.) * ACIT vs. Tara Ultima (P) Ltd. - 201163 DTR 333 - Mumbai Tribunal; that the assessee has desired the exclusion of M/s. Vishal Infotech ltd., as it finds that it will benefit by exclusion of this entity as a comparable; that the assessee had itself found this entity as a comparable entity in its own benchmarking analysis for A.Y. 2007-08; that besides, the DRP has given detailed reasons in this regard (pages 3-6 of the DRP's order, paras 9-15); t....
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....artment's Ground-wise counter is as under: 'Counter to Ground No.1 & 2 These are general in nature. Counter to Ground No.3 This is a settled issue. The Hon'ble DRP has considered this in paras 5 till 8, pages 2 & 3 of their order. This issue has been considered in detail in the Special Bench order of Aztec Software & Technology Services v. Asstt. CIT [2007] 107 ITD 14l. Reliance is also placed on the order of Ranbaxy Laboratories Ltd. v. Addl. CIT [2008] 110 ITO 428 (Delhi). Further, as held in the case of Aztec Software & Technology Services (supra), there is no requirement for the AO to hear the assessee, or record reasons before making reference to TPO. Counter to Ground No.4 & 5 The general discussion, as detailed in this letter is relevant. Counter to Ground No.6 This ground relates to functional comparability, and selection of com parables. The general discussion in this letter is relevant. Further, the provisions relating to safe harbour, have been conclusively settled in favour of Revenue, as being retrospective as detailed in this letter. Counter to Ground No.7 The aforesaid ground has been countered earlier in this letter. Merely because profits of t....
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....rces (may not be on the roll of the company) and is functionally similar to the taxpayer; and that RPT more than 25% as corporate guarantee is not acceptable, as this transaction does not have effect on profit & loss. 13. We find that M/s Vishal Information Technologies Limited has a different business model than that of the assessee, as it outsources execution of contracts to external vendors to save cost on employees which is also evident from the fact that employee cost for Vishal is 3% to the total cost, whereas in case of assessee, it is 60% to the total cost. 14. In the following cases, the assessee was involved in the business of Information Technology Enabled Services, and revenue sought to include M/s Vishal Information Technologies as comparable to compute the mean margin of the comparables, it was held by the ITAT that such comparable is functionally not comparable. The aforesaid conclusion has been arrived at by the Tribunal on the ground that it was outsourcing a considerable portion of its business and as such, it was held that the same was not comparable : (i) M/s Maersk Global Service Center (India) P.Ltd. - 145 TTJ 64.  ....
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....is an inappropriate comparable. The Chandigarh Bench of the ITAT, in the case of Quark Systems (P.) Ltd. (supra), has held that even if the taxpayer or its counsel had taken Datamatics as comparable in its TP audit, the taxpayer is entitled to point out to the Tribunal that the above enterprise has wrongly been taken as a comparable, and as such, the assessee is entitled to contend that the aforesaid comparable is not comparable, as being functionally dissimilar. 20. Too, in essence, in the case of Vishal, execution of contracts has been outsourced to external vendors and, as such, the company does not perform functions comparable to the assessee. A major portion of the execution is outsourced by it vis-a-vis the established in-house capability of the assessee to perform the execution of work. Also, as Vishal has been making high margins consistently, on this score itself, the same ought to be excluded from the set of comparables. Then, in the case of Vishal, over 20% of its operating costs in its audited financials consist of "work in progress". Such a significant part of operating costs being "work in progress" clearly signifies that the company is following a very different ope....