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2015 (6) TMI 98 - ITAT DELHI

2015 (6) TMI 98 - ITAT DELHI - TMI - Transfer pricing adjustment - ALP - excluding Vishal as a comparable - Held that:- Merely because the assessee had included a comparable in its TP documentation, it could not be debarred from seeking rejection of that company at a later stage of assessment appellate proceedings. Applying the same principle, the assessee pleads to consider the aforementioned reasons for excluding Vishal as a comparable. Further, under TNMM, minor differences in the business pr .....

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de M/s Vishal Information Technologies Ltd. from the list of comparables. - Decided in favour of assesse. - ITA NO. 3954/Del/2010 - Dated:- 29-5-2015 - SHRI S.V. MEHROTRA AND SHRI H.S. SIDHU, JJ. For the Appellant : Sh. Rohit Tiwari, CA For the Respondent : Smt. Anuradha Mishra, CIT(DR) ORDER PER H.S. SIDHU : JM This appeal by the Assessee is directed against the assessment order dated 8.7.2010 of the Assessing Officer passed u/s. 143(3) of the I.T. Act, 1961 pertaining to assessment year 2006-0 .....

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thout appropriate application of mind and in undue haste; 2. The Ld. DRP erred both on facts and in law in confirming the Ld. AO/ TPO's action of making an adjustment of ₹ 17,324,009 to the income of the appellant holding that its international transactions of provision of Back Office and and Vessel Planning Support Services do not satisfy the arm's length principle envisaged under the Act. In doing so the Ld. DRP has grossly erred in agreeing with the Ld. TPO's action of: 2.1. .....

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criteria/ reasons, thereby retaining only high-profit making companies (in the final comparable set) for benchmarking the appellant's international transactions; not appreciating the functional profile of the appellant and in applying inconsistent basis while adjudicating on the functional comparability of the comparables, thereby erroneously including in the final comparable set certain companies with differential functional profile; 2.4. not appreciating the fact that in the relevant asses .....

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le to the appellant at the time of preparing its TP documentation; 2.5.1. without prejudice, in considering only the comparables' analysis presented by the appellant in respect of its Back Office Support Services segment, carried out using current year data, submitted during the course of assessment proceedings while at the same time erroneously ignoring/ disregarding the comparables analysis presented by the appellant in respect of Vessel Planning Support Services carried out on the same ba .....

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risk bearing entity; 2.8.1. rejecting the detailed computation of risk adjustment submitted by the appellant during the assessment proceeding, based on various subjective premises/ presumption, while at the same time failing to provide an alternative basis for computation; 2.9. denying the benefit of (+!-) 5 percent [as per proviso to section 92C(2) of the Act] available to the appellant. The above grounds are without prejudice to each other The appellant craves leave to alter, amend or withdra .....

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e produced and examined on test check basis. The case was discussed with the authorised representatives. During the relevant previous year the assessee was engaged in the business of providing vessel planning support services and other back office support services to CSAV Group companies. The assessee entered into the following international transactions with its Associated Enterprises, as defined in section 92A of the IT Act: Name of the AE Description of transaction Amount received ALP declare .....

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IT Act. The Transfer Pricing Officer-I(4), New Delhi passed order uls 92CA(3) of the IT Act on 15.09.2009. In the report, the TPO determined the Arm's Length Price of different services provided by the assessee to its Associated Enterprises assessee at ₹ 17,11,62,701/- as against ₹ 15,38,38,692/- charged by the assessee for these services resulting in difference of ₹ 1,73,24,009/-. 2.2 Keeping in view the above, the assessee was asked to explain as to why addition of ₹ .....

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ng exercising the option of taking the ALP at 5% less or 5% more than the mean of comparable prices. The AO is of the view that firstly, this option could only be exercised if the assessee had suo-motto declared the ALP as the price of services charged by it to its Associated Enterprise as per section 92 of the IT Act. The assessee had this option at the time of filing of return which it failed to exercise. Secondly, even at the stage of assessment, the assessee has only stated that it wants to .....

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ter considering all replies and submissions of assessee, AO held that the total income of the assessee has to be determined on the basis of ALP determined by the TPO. The assessee did not exercise the option of taking the ALP at plus/minus 5% of the arithmetic mean of ALPs based upon different comparables. The AO has to compute the total income of the assessee as per the ALP determined by the TPO. AO referred the judgment of the Hon'ble Delhi High Court in the case of Moser Baer vs. Addition .....

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as determined by the TPO. 2.3 AO made the addition of ₹ 1,73,24,009/-, being the difference between the Arm's Length Price and the price charged by the assessee and added to the income of the assessee u/s 92C(4) of the IT Act. 2.4 The Draft Assessment Order was passed under section 144C of the I.T. Act in this case on 29.12.2009. The assessee preferred appeal before the Dispute Resolution Panel against this order under the provisions of this section. The DRP-I, New Delhi passed order u .....

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ed in the list of comparable. It is found surprising that assessee wants to reject his own comparables offered initially in his TP report. Such cherry picking has not been argued out. The TPO s order needs no further intervention . The AO has passed this order as per the draft assessment order dated 29.12.2009 and finally the income of the assessee was assessed as under:- Income from business as declared by the assessee: ₹ 11,68,763 Add: Addition U/S 92C(4) as discussed above: ₹ 1,73 .....

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he Synopsis. 6. On the other hand, Ld. DR relied upon the order of the AO. 7. We have heard both the parties and perused the relevant records available with us, especially the order of the Revenue Authorities and the synopsis filed by the assessee. We find that during the Financial Year ('FY') 2005-06, the assessee undertook the following international transactions with its AEs: a) Provision of services b) Cost recharges (paid) c) Reimbursement of expenses (received) 7.1 The above mentio .....

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to as 'back-office segment'. 7.3 The assessee's international transactions of reimbursement of expenses have been accepted by the Transfer Pricing Officer (Ld. TPO') to be-at arm's length. 7.4 For establishing the arm's length nature of its operations in the vessel planning segment and back-office segment, in its Transfer Pricing (TP) Report for the relevant FY, the assessee adopted Transactional Net Margin Method ('TNMM') as the Most Appropriate Method ( MAM' .....

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of Appeal set) Particulars Vessel Planning Services Back Office services PLI used OP/TC OP/TC No of comparables 7 20 Comparables' margin 11.01% 9.93% Appellant's margin 18% 13% Conclusion At arm s length At arm s length 7.6 During the course of the TP assessment proceedings, the Ld. TPO directed the assessee to submit the current year (i.e., FY 2005- 06) data for comparable companies considered in its TP study. Further, the Ld. TPO proposed to aggregate the 'vessel planning segment&# .....

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analysis carried out by the assessee and analyzed the appellant as an ITES/ back-office service company on an entity wide basis, computing the appellant's entity-wide OPITC margin at 15.06%. 7.8 Further, the Ld TPO disregarded the fresh search undertaken by the appellant for benchmarking its 'vessel planning segment' and instead proceeded to benchmark the assessee on an entity wide basis on the basis of the fresh search analysis (referred above) undertaken by the assessee for benchm .....

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relied upon the set of top 5 high profit making comparable companies with a mean OPITC margin of 28.02 percent, thereby arriving at a TP adjustment of ₹ 17,324,009. 7.10 Pursuant to the order passed by the Ld. TPO, the Ld.AO issued a draft order computing the total income, of the asssessee at ₹ 18,492,770 after considering the TP adjustment of ₹ 17,324,009. 7.11 Aggrieved with the draft assessment order, the assessee filed its detailed submissions in the form of objections befo .....

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iled analysis of the 13 comparable companies relied upon by the appellant, the Ld. TPO has erred in rejecting certain companies considered comparables by the appellant and ultimately resorted to a set of high profit making comparables to arrive at the ALP. In doing this the Ld. TPO, has erroneously rejected only those 8 companies which were lossmaking/ low profit making companies on the alleged/ purported grounds of functional dissimilarity and retained the top 5 comparable companies with very h .....

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Rejected 9 Ask Me Info Hubs Ltd. 4.67% Rejected 10 Indus Networks Ltd. (ITeS Segment) 4.20% Rejected 11 Tata Services Ltd. 2.07% Rejected 12 Datamatics Financial Services - 14.24% Rejected 13 Twinstar Software Exports Ltd - 29.55% Rejected Mean 10.56% Final set of comparables by the Ld. TPO: Table 4: Fresh Search Comparables for Back-office services S. No. Company Name OP/TC TPO s Disposition 1 Vishal Information Technologies Ltd. 63.56% Accepted 2 Triton Corp Ltd. 20.58% Accepted 3 C S Softwar .....

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the comparable companies i.e., Cosmic Global Services, accepted by the Ld. TPO in the final comparable companies set clearly and unambiguously specifies that the company's activities being IT services include medical transcription, translation and software development. (for relevant extracts please refer Annexure 1 of this Submission). 12. The functions carried out by two of the comparable companies, i.e., Indus Networks and Twinstar Software Exports, rejected by the Ld. TPO on account of f .....

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arily comprise of providing software services, IT enabled services, manufacturing and others. (for relevant extracts please refer Annexure 2 of this submission) For the purposes of the benchmarking analysis the profitability of the company s ITES business segment has been considered. (please refer page no. 139 of the Paper Book) ITES in the nature of back office operation and medical transcriptions (domestic sales and exports) constitute the company s entire operations. (for relevant extracts pl .....

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set, it is pertinent to note that on accepting the top 5 high profit margin companies the Ld. TPO failed to consider the following facts pertaining to Vishal Information Technologies which clearly evidence that it is functionally not comparable to the assessee 15. During the relevant year, the company is providing agency services by way of outsourcing the services to third party vendors and acting as an intermediary between the final customer and the vendor. This is evident from the fact that d .....

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costs 1,915,371 1,970,458 3,201,756 Sales 138,822,227 208,233,000 256,428,476 Vendor payment as a percentage of sale 55.42% 54.51% 44.81% Personnel cost as a percentage of sale 1.38% 0.94% 1.25% Appellant s Personnel cost as a percentage of sale NA 51.01% 55.07% 16. We find that the intermediary functions of Vishal can only be compared to that of a distributor which takes title to service product for resale to the customer. On the contrary the asessee is a provider of back office services on it .....

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ent company Amex Information Technologies Limited ('Amex') undertook certain restructuring exercise resulting in its entire ITES operations being conducted through Vishal Information Technologies. 19. As a result of the restructuring exercise, Amex sold its 100% stake in Basiz Fund Accounting Services Limited (a separate entity formed by conversion of the Fund Accounting KPO & E Accounting division of Amex) to Vishal at market value. Further, Amex's E Publishing & Digital Lib .....

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challenged. (for relevant extracts please refer Annexure 4.1 of this Submission) 21. However, in complete disregard of the submissions/contentions of the assessee, the Ld. DRP/Ld. TPO stated that the assessee cannot claim that Vishal is functionally not comparable just because the TPO has alleged that some other companies (also considered by the assessee) are functionally not comparable. 22. In this regard, the assessee s counsel stated that merely because the said company was considered in the .....

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;Sony Ruling') (for relevant extracts please refer page no. 55.. to 56 of the Compendium of Case Laws): "We are also not impressed by the arguments of learned Departmental Representative that Videocon International was included in the list of comparables furnished by the taxpayer. In our considered opinion, there is sufficient material on record to show that taxpayer in proceedings before the TPO as well as before the learned CIT(Appeals) had argued that there were huge differences betw .....

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ems Pvt. Ltd. lTAs No. 115/CHD/2009 and 100/CHD/2009] ('Quark Ruling') (for relevant extracts please refer page 110. 87 and 89 of the Compendium of Case Laws), wherein the Hon'ble Tribunal has opined in the following manner: 30. Learned Special counsel for the revenue Shri Kapila has vehemently argued that "Datamatics" was taken as one of the comparables by the taxpayer and no objection to its inclusion was raised before the TPO or before the learned CIT (Appeals) in appeal .....

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….. 38. Accordingly on facts and circumstances of the case, we hold that taxpayer is not stopped from pointing out that Datamatics has wrongly been taken as comparable. While admitting additional ground of appeal raised by the assessee to require us to consider whether or not Datamatics should be included in the comparable, we make no comments on merit except observing that assessee from record has shown it's prima-facie case. 25. Ld. Counsel of the assessee also stated that the issue .....

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ll as TPO has not gone into verticals / horizontals of the ITES sector while selecting comparables. However, as can be seen from the materials placed on record, the employee cost of this company is abnormally low compared to the assessee, which presupposes that it has outsourced major portion of its work to third parties. ITAT Mumbai Bench in case of Maershk Global Services Centre (India) Pvt. Ltd. (14 ITR [Trib] 541) after considering this aspect rejected it as a comparable. Following the afore .....

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fact that most of the cost incurred by the company taken as comparable is outsourcing cost, as can be seen from the Annual Report placed in the paper book and ITAT, Mumbai in the case of Maersk Global Service Centre (Supra) has analysed and rejected this company as comparable, due to the reason that it has outsourced a considerable portion of its business and it is functionally different. This factor was also approved by the DRP in assessee s own case in the later year, as can be seen from the c .....

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se of M/s Google India Pvt. Ltd. vs. DCIT passed on 19.10.2012 in ITA No. 1368/Bang/2010 Assessment Year 2006-07 vide order dated wherein the Vishal Information Technologies Ltd. has been excluded from the list of comparables. The relevant finding of the Tribunal in this regard as under:- 15. As regards is issue of (8) Vishal Information Technologies Ltd., we find that, it is adopted by the TPO. The DRP held that Vishal Information Technologies has outsourced its call centre work and, therefore, .....

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uch circumstances, the net margins of the two comparables cannot be on the same basis. The decisions relied upon by the learned counsel for the assessee also held that the employee cost filter is important filter to be adopted for the purpose of computing ALP. In the case of Maersk Global Services Centre (India) Pvt. Ltd., in ITA No. 3774/M/2011, the Tribunal at Mumbai has held that Vishal Information Technologies Ltd., has to be excluded from the list of comparables of ITES company as it has ou .....

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Vishal as a comparable. Further, under TNMM, minor differences in the business profile of the appellant and the comparables would be evened out. However, selecting only few comparables from the entire comparable set would defeat the meaning of application of TNMM as the most appropriate method. 28. Further, without prejudice to the assessee's contentions of including other low profit/loss making companies, the following Table summarises the average operating margin results after excluding Vi .....

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