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2015 (5) TMI 354 - ITAT DELHI

2015 (5) TMI 354 - ITAT DELHI - TMI - Transfer pricing adjustment - selection of comparable - Held that:- Eclerx Services Ltd. engaged in providing data analytics services with expertise in financial service and retail and manufacturing as thus be excluded from the list of comparables for the reason that it is providing high end services involving specialised knowledge and domain expertise and same cannot be compared with companies which are mainly engaged in providing low end services to group .....

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comparable list as The promoters of the company were involved in the fraud for earlier years, hence the financial results of these companies are distorted and accordingly cannot be relied upon.

Mold-tek Technologies Limited is engaged in providing engineering consulting services as part of its IT operations. The Company has specifically categorized its IT operations as KPO in its annual report. The Company has also accepted in its reply u/s 133(6) that the company provides engineering .....

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Dated:- 27-4-2015 - Shri J. S. Reddy And Shri George George K.,JJ. For the Appellant : Shri Arun Chhabra & Ms Kanika Makkar, CAs For the Respondent : Shri Judy James, Standing Counsel DR ORDER Per George George K., JM: These are the cross appeals directed against the CIT(A) s order dated 28.09.2012. The relevant assessment year is 2007-08. 2. In assessee s appeal (ITA No.6034/Del/2012), 16 grounds are raised, however, in the course of hearing, the Ld. Authorised Representative of the assesse .....

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the ambit of IT Enable Services . 4. We shall first take up for adjudication the assessee s appeal. ITA NO.6034/Del/2012 (ASSESSEE S APPEAL) 5. The brief facts of the case are that the assessee is a company, incorporated on 30.09.2004. The assessee is subsidiary of Intellirisk Management Corporation (IRMC, US) providing information technology enabled services (ITES) to its AE namely, IRMC US for the relevant financial year. In the TP documentation, the assessee was characterized as limited risk .....

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taken and three years weighted margin of the comparables were determined at 16.95%. The assessee margin was shown at 15.90% and therefore it was stated in the TP study, the international transactions were at arm s length. 7. The TPO rejected the transfer pricing study conducted by the assessee. The TPO conducted an independent search of comparable, based on the Functions, Assets and Risks (FAR) of the assessee. The TPO also used a different set of filters to select the comparables and arrived a .....

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ithmetic mean of the Profit Level indicator is taken as the arms length margin (Please see Annexure E for details of computation of PLI of the comparables). Based on this, the arms length price of the IT enabled services rendered by you is computed as under : Arithmetic mean PLI : 30.07% Less: Working Capital adjustment (Annexure-F): 1.78% Adj. Arithmetic mean PLI : 28.29% Arms Length Price: Operating Cost Rs.115,688,589 Arms Length Margin 28.29% of the Operating Cost Arms Length Price (ALP) Rs. .....

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ating profit/total cost (OP/TC) which also accepted by the TPO. 9. Aggrieved by the adjustment made to the arm s length price, assessee preferred an appeal to the CIT(A). The CIT(A) partly rejected the objection of the assessee. 10. Aggrieved by the order of CIT(A), the assessee is in appeal before us, raising sixteen grounds. However, in the course of hearing of appeal, the Authorised Representative confined his arguments to Ground No 7, namely, whether the CIT(A) was justified in including in .....

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he Appellant operating with a margin of 15.90%. In this regard, it is respectfully submitted that the ITAT Special Bench (Mumbai), in case of Maersk Global Centres (India) Private Limited Vs. ACIT Cir 6(3) ((I .T.A. No.7466/Mum/2012),para no. 99, (page 695-696 of the paperbook) has held that companies earning abnormally high profits should invite further investigation to ascertain whether the entities earning such super normal profits should be included in the list of final comparables or not. E .....

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paper-book) The Appellant draws your attention to the ruling of the Hon ble Special Bench in the matter of 'Maersk Global Centres (India) Private Ltd vs ACIT (I .T.A. No.7466/Mum/2012) (Please refer page 692-694 of the paper-book). The relevant portion of the said ruling is produced here-in-under: In so far as M/s eClerx Services Limited is concerned, the relevant information is available in the form of annual report for financial year 2007-08 placed at page 166 to 183 of the paper book. A .....

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specialized services for meeting complex client needs, data analytics KPO service provider specializing in two business verticals - financial services and retail and manufacturing. It is claimed to be engaged in providing solutions that do not just reduce cost, but help the clients increase sales and reduce risk by enhancing efficiencies and by providing valuable insights that empower better decisions. M/s eClerx Services Pvt. Ltd. is also claimed to have a scalable delivery model and solutions .....

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and output gains with better control over quality. Keeping in view the nature of services rendered by M/s eClerx Services Pvt. Ltd. and its functional profile, we are of the view that this company is also mainly engaged in providing high-end services involving specialized knowledge and domain expertise in the field and the same cannot be compared with the assessee company which is mainly engaged in providing low-end services to the group concerns. For the reasons given above, we are of the view .....

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taken by the AO/TPO as per the direction of the DRP. Emphasis supplied The Appellant humbly contends that the aforesaid ruling is equally applicable to the case of the Appellant. The Appellant is a low end service provider engaged in providing call center services to itsAE. It is respectfully submitted that majority of the workforce of the Appellant comprises of graduates and undergraduates and the services provided by Appellant does not require any specialized knowledge or skills. In view of th .....

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Ltd. (ITA No.124/Hyd/2014) AY 2009-10 Para 18.2 (Page 700-701 of paperbook ) • Cognizant Technology Services Pvt. Ltd. Vs. ACIT (ITA.Nos. 2106 & 1864/Hyd/2011) AY 2007-08 & 2008-09 (Page 709-719 of the paperbook) • Zavata India Private Limited Vs. The DCIT (ITA No.1781/Hyd/2011) AY 2007-08 (page 722-723 of the paperbook) • C3i Support Services P. Ltd. Vs. ACITT (TA.No.2183/Hyd/2011) AY 2007-08 (page 737-738 of the paperbook) • M/s. Excellence Data Research Pvt. Ltd. .....

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k) • M/s. Berkadia Services India Private Limited vs DCIT AY 2009-10(ITA No. 1802/hyd/2013)(refer page 1339-1341 of paperbook) Vishal InformationTechnologies Private Limited ( Vishal )(Refer Page 18 of Chart of Issues) The Appellant had raised the claim for rejection of Vishal during the assessment proceedings and before the CIT(A). Vishal is engaged in diversified activities such as e-publishing. It is therefore functionally different from the Appellant. Hon ble Delhi bench of the tribunal .....

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egard, it is respectfully submitted that the Hon ble High Court in the case of B.A. Continuum India Private Limited (I.T.A.A. No. 440 of 2014) has upheld the rejection of Vishal by relying on the ITAT ruling in the case of M/S Brigade Global Services Private Limited vs ITO ward 1(1) AY 2005-06 [143 ITD 59] wherein Vishal has been rejected on account of the fact that its employee cost to total cost ratio is very low. It is also respectfully submitted that the ITAT Special Bench (Mumbai), in case .....

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mployee cost and outsourcing model. Your Honours attention is also invited to the recent decision of the Honble Delhi bench in case of Techbooks International Pvt. Ltd. Vs. ACIT Cir-1, ITA No.4990/Del/2011, Noida, AY 2007-08 Para 21-24, (page 854 of the paperbook),wherein, after a detailed analysis, Hon ble Bench has rejected VishaL as a comparable even though the assessee had initially included the same as a comparable company. The Tribunal took note of the low employee cost of Vishal at 3% as .....

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wherein the bench has rejected Vishal on account of the fact that it has different business model. Furthermore it is humble submission of the Appellant that the Ld. TPO has used the information obtained u/s 133(6) to refute the contentions of the Appellant (Refer page no. 59-60 of the TPO order). However the information has been used in relation to subsequent financial year, i.e. FY 2007-08. However, the same has not been shared with the Appellant. The significant functional differences coupled .....

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ed by the Hon'ble Tribunal: • M/s. United Health Group Information v/s ACIT (ITA No. 6312/Del/2012) AY 2008-09 ( refer page885-886 of paperbook) • M/s Mercer Consulting (India) Private Limited vs DCIT (ITA No. 966/Del/2014) • M/s. Google India Private Limited vs. DCIT (I.T.(TP). A. No. 1170/Bang/2011) AY 2007-08 Para 20 (page 881 of the paperbook) • C3i Support Services P. Ltd. Vs. ACITT (TA.No.2183/Hyd/2011) AY 2007-08 Para 12.4.1 (page 736-738 of the paperbook) • S .....

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7-08 Para 17 (page 720-721 of the paperbook) • M/s. Maersk Golbal Service Centres (India) Private Limited vs DCIT AY 2009-10 (ITA No. 2594/Mum/2014) (page 1203-1204of the paperbook) • M/s. BNY Mellon International Operations India (Private) Limited vs DCIT AY 2008-09 (ITA No. 2380/PN/2012) (page 1262-1265of the paperbook) In view of the above it is pleaded that this company be rejected from the comparables list. Maple ESolutions Limited ( Maple )and Triton Corp Limited ( Triton )(Refer .....

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) Ltd.(ITA No. 4068 (Del)/2009) AY 2006- 07 (page 889-891 of the paperbook) • M/s.Stream International Services Pvt.Ltd vs. ACIT AY 2007-08 (ITA No. 8290/Mum/2011) (page 1351-1352 of the paperbook) • M/s. Pentair Water India Pvt. Ltd. vs. ACIT (ITA NO. 02/PNJ/2013) and ACIT vs. M/s. Pentair Water India Pvt. Ltd. (ITA NO. 05 /PNJ/2013) AY 2006-07 Para 4.3.1 (i) (page 893 of the paperbook) • M/s. IVY Comptech Pvt. Ltd. vs. The ACIT (ITA No. 1558/Hyd/2010) AY 2005-06 Para 7(b) (page .....

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mpany has income to the tune of INR 5.8 crores from trading of IT peripherals, which is more than 10% of the total revenue of this company. No segmental information has been reported and during FY 2008- 09 the Ld. TPO has himself rejected this company on this ground. Also, the Ld. TPO himself rejected Triton in the first show cause notice issued by it dated 7th May 2010 and introduced it in the set in the second notice dated 27th August,2010. In view of the above, it is pleaded that this company .....

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levant documentary evidences brought to our notice during the course of hearing. Let us now consider the companies which have been strongly objected by the Ld. Counsel for being considered in the final list of comparables. (i) Eclerx Services Ltd. Eclerx is engaged in providing data analytics services with expertise in financial service and retail and manufacturing. The service provided by the company are high end in nature involving special knowledge and domain expertise and therefore, not func .....

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mbai/ 2012) had excluded Eclerx Services Pvt. Ltd. from the list of comparables for the reason that it is providing high end services involving specialised knowledge and domain expertise and same cannot be compared with companies which are mainly engaged in providing low end services to group companies. The relevant finding of the Hon ble Tribunal read as follows :- In so far as M/s eClerx Services Limited is concerned, the relevant information is available in the form of annual report for finan .....

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s. It is claimed that eClerx is a different company with industry specialized services for meeting complex client needs, data analytics KPO service provider specializing in two business verticals - financial services and retail and manufacturing. It is claimed to be engaged in providing solutions that do not just reduce cost, but help the clients increase sales and reduce risk by enhancing efficiencies and by providing valuable insights that empower better decisions. M/s eClerx Services Pvt. Ltd .....

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uctivity, allowing customers to benefit from further cost saving and output gains with better control over quality. Keeping in view the nature of services rendered by M/s eClerx Services Pvt. Ltd. and its functional profile, we are of the view that this company is also mainly engaged in providing high-end services involving specialized knowledge and domain expertise in the field and the same cannot be compared with the assessee company which is mainly engaged in providing low-end services to the .....

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two entities be excluded from the list of 10 comparables finally taken by the AO/TPO as per the direction of the DRP. The above ruling of Hon ble Special bench is equally applicable to the facts of this case, as it is evident from the functional profile of the assessee company that it is a low end services provider, namely, engaged in providing call centre servers to its AE. For the aforesaid reasons, we direct the TPO to exclude Eclerx Services Ltd. from the final list of comparables. (ii) Vish .....

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of 3% in comparison to 60% of assessee in that case. In the relevant year assessee wages/total cost ratio stands at 58.01%. and therefore not functionally comparable with the assessee company. Moreover, Vishal is very high profit making company and operates on outsourcing model and hence, has different business model to that of assessee. Further, the CIT(A) in the subsequent year i.e AY 2008-09 also rejected the same from the list of comparable in the assessee s own case. Therefore, we accept th .....

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d/2011) AY 2007-08 Para 19 (page 831-832 of the paperbook) • ITO vs. CRM Services India (P) Ltd.(ITA No. 4068 (Del)/2009) AY 2006- 07 (page 889-891 of the paperbook) • M/s.Stream International Services Pvt.Ltd vs. ACIT AY 2007-08 (ITA No. 8290/Mum/2011) (page 1351-1352 of the paperbook) • M/s. Pentair Water India Pvt. Ltd. vs. ACIT (ITA NO. 02/PNJ/2013) and ACIT vs. M/s. Pentair Water India Pvt. Ltd. (ITA NO. 05 /PNJ/2013) AY 2006-07 Para 4.3.1 (i) (page 893 of the paperbook) &bul .....

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tax (ITA No.8997/Mum/2010) AY 2006-07 Para 17, (page 911 of the paperbook) In view of the above we direct for the exclusion of this company from the final list of comparables. 14. Considering the functional analysis of this company discussed hereinabove and in the light of the various orders of the Tribunal (supra), we direct for the exclusion of the Eclerx Services Ltd., Vishal Information Technologies Pvt. Ltd. Maple E Solutions Ltd. and Triton Corporation Ltd. from the final list of comparabl .....

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l reporting of the company as quoted in the earlier paragraphs creates a sufficient doubt about the truthfulness of the results of ITES segment. This company has two segments, ITES and Plastic division. ITES is having 100% exemption whereas on the profits of plastic division the company has to pay tax. It is not uncommon to see such financial results where the tax exempt unit has extraordinary profit while the taxpaying unit suffers losses under the same management control. The extraordinary pro .....

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ant, this ratio (Employee cost / Sales) is much higher in the case of the appellant and 7.6% in the case of Mold-Tek Technologies Ltd. By implication, either Mold-Tek Technologies Ltd. has employed larger capital against the man power to get the kind of productivity to generate profit of 113% or the employees are so extraordinary that they have accepted the lower wages and still work so hard for the company to generate that kind of profitability. In either situation, the company becomes not comp .....

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old-tek Technologies Limited ( Mold-tek ) in view of the CBDT Circular No.SO890(E) dated 28/09/2000 wherein it was held that engineering design is within the ambit of IT enabled services. There is no infirmity in the order of CIT(A) has passed a detailed well-reasoned order citing cogent reasons for rejection of the said comparable. (Refer page 52 to 56 of CIT(A)). The rejection of Mold-tek is also warranted for the following reasons: Your Honours' attention is invited to the difference in t .....

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her investigation to ascertain whether the entities earning such super normal profits should be included in the list of final comparables or not. The company is engaged in providing engineering consulting services as part of its IT operations. The company has specifically categorized its IT operations as KPO in its annual report (Refer page 518 of the paperbook). Further as per the reply u/s 133(6) the company provides engineering design drawing and detailed structural engineering using 3D and 2 .....

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ng from the conventional design &detailing tools like CAD/CAM/Stadd Pro to the contemporary software tools like X-Steel, SDS-2 and RISA. The respondent would like to draw your attention to the fact that the company witnessed certain extraordinary circumstances in the year. As evident from the annual report of the company for FY 2006-07, the company has acquired Cross Road Detailing Inc., an engineering services KPO in April 2007. Further, the company has plans to merge M/s. Teck Men Tools Pr .....

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the IT (KPO) Division billings from ₹ 375 lakhs in 2005-06 to ₹ 1140 lakhs in 2006-07. Apart from enhancing billings, IT (KPO) Division has contributed towards more than doubling the profitability of your Company……. ……….The manpower, which was 40 in the year 2005, is now more than 200. (Refer page no. 475 of the paperbook) In addition to the above, it is also worth noting that the TPO has himself applied diminishing revenue filter wherein the compa .....

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cordingly, Moldek should be rejected as comparable company. Further as evidenced from the annual report of the company for FY 2007-08, the company gave effect to the above scheme of amalgamation and demerger with effect from October 2006 and the entire accounts of the company for FY 2006-07 were also revised. In the case of Toluna India Private Limited vs. ACIT AY 2007-08 (ITA No. 5645/ Del/2011) (Refer page 840 of the paperbook) it was held that a company cannot be considered as comparable beca .....

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to 151 of the paper book that the said company was pioneer in structural engineering KPO services and its entire business comprised of providing only structural engineering services to various clients. Further information of Mold-Tek Technologies Ltd. available on their Website is furnished in the form of printout at page 158 to 165 of the paper book and a perusal of the same shows that it is a leading provider of engineering and design services with specialization in civil, structural and mecha .....

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lso rendering web design and development services with experience in turning them into an effective graphic design representation and creating dynamic and graphic rich web applications from IT specs, design prints etc. Keeping in view this information available in the annual report of Mold-Tek as well on its website, we are of the view that the said company is mainly involved in providing high-end services to its clients involving higher special knowledge and domain expertise in the field and th .....

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e gain or loss arising from the forward contract entered into for the purpose of foreign currency exposure on the export and import has to be taken into consideration while computing the operating profit………………. …………..For the reasons given above, we are of the view that if the functions actually performed by the assessee company for its AEs are compared with the functional profile of M/s eClerx Services Pvt. Ltd. and Mold-Tec T .....

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nal comparability of the company are equally applicable to the case of the respondent. The respondent is a low end service provider engaged in providing call center services to its AE. In view of the above, it is pleaded that this company be rejected. The respondent s contentions are fortified by several rulings of the coordinate benches of the Hon ble ITAT. These rulings are produced here-inunder for the kind perusal of your honours: • Capial IQ Information Sytems (India) (P.) ITA No. 1961 .....

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