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TMI Blog2015 (6) TMI 677X X X X Extracts X X X X X X X X Extracts X X X X ..... icer, Ward 2(2), Kolkata (hereinafter referred to "Ld AO") has erred in making an adjustment of Rs. 13,157,697 to the international transactions of the assessee with its Associated Enterprise (hereinafter referred to as 'AE'). 2. That on the facts and in the circumstances of the case, the Ld. TPO, Ld.Panel and consequently the Ld. AO has erred by not considering the importance of functional comparability while selecting the comparables. 3. That on the facts and in the circumstances of the case,, the Ld. TPO, Ld.Panel and consequently the Ld. AO has erred by adopting a faulty and non-statistical approach for rejecting the abnormally high profit making companies and by applying a band of Profit Level Indicator (PLI) in the range of 10% to 50%. 4. That on the facts and in the circumstances of the case, the Ld. TPO, Ld.Panel and consequently the Ld. AO erred in undertaking fresh search for comparability analysis (FY 2006-07) as per the show cause notice dated 04-10-2010. By following the said approach the Ld. TPO himself travelled beyond the date of compliance i.e. October 31, 2007 resulting into impossibility of performance and against the premise of maintenance of "contemporane ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omputer software outside India. 12. That on the facts and in the circumstances of the case, the Ld. AO has erred in disallowing the exemption under section 10A and 10B totaling to Rs. 4,54,183/-, by deducting expenses amounting to Rs. 48,84,548/- , from the export turnover which were incurred on account of expenses in foreign currency, bandwidth and connectivity charges, overseas insurance and World Interner Charges (Vonnage)ISD lease line. 13. That on the facts and in the circumstances of the case, the Ld. AO has erred by deducting the relevant expenses from the export turnover only and not from the total turnover of the assessee. 14. That on the facts and in the circumstances of the case, the Ld. AO has erred in disregarding the principle of erstwhile section 80HHC in section 10A and 10B case. 15. That the assessee craves leave to add to and to alter, amend, rescind or modify the grounds raised hereinabove before or at the time of hearing of the appeal." 3. The assessee is a 99.99% subsidiary of Acclaris Inc. and was incorporated on 6th June, 2003. The assessee provides Back Office Processing services (BPO) to Acclaris Inc., as a captive service provider in relation to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rms' length. The TPO vide its order dated 29th October, 2010 u/s 92CA(3) of the Act, made an upward adjustment of Rs. 1,31,57,697/- to the international transaction of the assessee with respect to rendering of services to AE. The TPO accepted all other international transactions of the assessee with its AE, to be at arms length. 3.3. The TPO had rejected the comparables chosen by the assessee and selected the comparables by applying the following filters : (i) All companies having account of the year 2006-07 (ii) Company engaged in IT enabled services (iii) Sales between Rs. 5.0 crores to Rs. 15 crores. (iv) Operating profit more than zero, so as to exclude the loss making companies. 3.4. Some of the comparables having related party transactions as a percentage of sales of more than 10% were rejected. Thereafter the TPO chose a band of Profit Level Indicator (PLI) with the range of 10-50% to be applicable to the business of the assessee and finally proceeded to benchmark the international transaction by selecting the following five comparables : Sl.No. Name of the Company OP/TC Final OP/TC 1. Galaxy Commercials Ltd. 23.53% 23.53 2. ICRA Onlin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BPO units. The case of the assessee is that the assessee being a non voiced based BPO company cannot be compared to voice based companies while applying the TNMM method. 6. We have considered the facts of the case and submissions made before us. We are in agreement with the submissions made by the assessee that the aforesaid comparables i.e. Maple Esolutions Ltd. cannot be selected for the purpose of benchmarking in the case of the assessee while applying TNMM method.. The TPO failed to appreciate that the aforesaid comparable company and the assessee are engaged in different businesses altogether. As the business model of voice based companies is of totally different nature than that of non voice based companies, we have no option but to exclude the comparable Maple E-solutions Ltd. for the purpose of benchmarking.. It is pertinent to mention here that the aforesaid comparable company was also involved in fraud and the business reputation came under serious indictment. For this reason also the comparable must be excluded. 6.1. It shall be apposite to refer to judicial precedents on the aforesaid issue to fortify our reasons to exclude the comparable stated above. In the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rucially different. It was also submitted that the finding to the fact that the assessee was also performing non-voice based services is not correct as it is based on the functions performed by TP USA. It was also submitted that the assessee was a start-up company with this year being the first year of full operations while the companies identified were old and established companies. They were performing different functions. The points of divergence have been tabulated by the ld.CIT(Appeals) on page nos. 40 and 41." Coming to the rejection of six comparables chosen by the TPO, our attention has been drawn towards the findings of the ld. CIT(A) that for the purpose of comparability between the tested party and the uncontrolled party, the nature and line of business, product or service market, the size and scope of operation and the stage of business are required to be seen. From the submissions made by the assessee and the perusal of annual report, it is found that the comparables taken by the TPO are engaged in totally different businesses. The details have been mentioned in a tabular form on page nos.47 and 48 of the impugned order. The table is reproduced below :- Sl.No. Nam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a company engaged in BPO services. The risk undertaken and the assets employed by a software development company cannot be compared to a BPO company. 6.5. A similar issue arose for consideration before the ITAT Chennai Bench in the case of S.R.A.Systems Ltd. vs ACIT (2014) 147 ITD 353 wherein the Tribunal has held as under :- "7. We considered this issue in detail. It is the case of the assessee before the lower authorities that the turnover of the assessee for the past five years averaged to Rs. 25 crores and therefore its turnover base for the purpose of arriving at comparables should be taken in the range of Rs. 15 to 25 crores after eliminating related party transactions. On the above basis, the assessee stagted that the PLI came to 2.53% as against the PLI reported by the assessee at 3.33%. Even when the turnover criterion is adopted at Rs. 50 crores, the PLI came to 3.18%, which is much higher than the PLI criterion of 2.53%. It was the contention of the assessee that the business model of the assessee is based more on turnkey projects, where cost overruns were borne by the assessee that actual bench costs were much more than that estimated by the assessee, that the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparable independent companies performing similar functions, was determined at 7.62%. As the assessee earned NCP of 7.90% from its international transactions, it was concluded that such transactions with AEs were at ALP. The Assessing Officer made reference to TPO for computation of ALP in respect of international transactions. The TPO, vide his order dated 31.10.2008, computed the adjustments to the ALP amounting to Rs. 10,49,07,225. In such computation the TPO noted in para 4 of his order that "No companies were identified as comparables". He selected twelve companies as comparable with the assessee's international transactions, depicting the NCPs as under:- Table B Sr.No. Comparable companies OP/T % 1. Allsec Technologies Limited 30.49 2. Tulsyan Technologies Ltd. (Cosmic Global) 19.08 3. Saffron Global 24.89 4. WIPRO BPO Solutions Ltd. 27.60 5. Vishal Information Technologies Ltd. 45.65 6. Ace Software Exports Ltd. 15.46 7. Nucleus Netsoft & GIS India Ltd. 40.60 8. Asian Cerc Information Technology Ltd. 37.40 9. Airline Financial Support Services (I) Ltd. (Seg) 26.54 10. Goldstone Teleservices ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d [(2011) 133 ITD 543 (Mum)] to bring home the point that the case of Cepha Imaging Private Limited should be excluded as the same has been held by the tribunal in that case as incomparable." "4.4. Adverting to the facts of the instant case we find that the assessee in Mearsk Global Service Centres (India)Private Limited (supra) was a service provider rendering back office support service to its Associated Enterprises (AEs). In para 29 of this order, it has been recorded by the tribunal that the activities undertaken by the assessee were essentially ITES, such as, data entry, transcription and data of shipping documents such as bill of leading etc. The instant assessee before us is also in the same line of business providing similar services as were rendered in the case of Mearsk Global Service Centres (India)Private Limited (supra). Further the A.Y. in both the cases is also similar, that is, 2005-2006. In that case also, the TPO introduced Cepha Imaging Private Limited as comparable. However, the Tribunal vide para 48 of its order observed that this company is "engaged in providing software development service as its evident from their annual report available on pages 52 onward ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail." 8.1. A bare perusal of the aforesaid rule goes to show that there is no prohibition in considering companies with high profit or high losses as comparables for bench marking international transactions to the arm length price. However, if there are specific and particular reasons evidencing abnormal profits or losses margin of the comparable, only then the comparable can be excluded. The burden to demonstrate the same is on the assessee. In the present case, no such particular facts have been brought on record to substantiate the reasons for high profitability of these comparables. In any case, comparables cannot be excluded for the sole reason that they are of high profitability margin. Such cases of high profitability or losses only invite further scrutiny as to the specific and particular reasons demonstrating abnormal profits/losses. 8.2. Even otherwise, the Indian Transfer Pricing Regulations differ from OECD Guidelines and US Transfer Pricing Regulations in this respect. The Indian Transfer pricing Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above enterprise has wrongly been taken as comparable. In fact there are vast differences between tested party and the Datamatics. The case of Datamatics is like that of "Imercius Technologies" representing extreme positions. If Imercius Technologies has suffered heavy losses and, therefore, it is not treated as comparable by the tax authorities, they also have to consider that the Datamatics has earned extraordinary profit and has a huge turnover, besides differences in assets and other characteristics referred to by Shri Aggarwal." The above observations of the special Bench is a pointer to the fact that where there are extraordinary profits and those companies are considered by the TPO for comparability but loss making companies are not considered as comparable, that would improper. The Tribunal found that such contradiction in approach should not be permitted. Similarly in the case of M/S. Sap Labs India Pvt. Ltd. 2010-TII-44-ITAT Bang-TP had observed as follows: "86. At the than 10 or 5, even below that. We have already considered that the agreement entered into by the assessee with its German associate concern has contemplated a compensation of cost plus 6 per cent, or 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ian regulations specifically deviate from OECD guidelines and provide Arithmetic Mean method for determining ALP. Int he quartile method, companies that fall in the extreme quartiles get excluded and only those that fall in the middle quartiles are reckoned for comparability. Hence, cases of either abnormal profits or losses (which are referred to as outliners) get automatically excluded. In the arithmetic mean method, all companies that are in the sample are considered, without exception and the average of all the companies are considered as the ALP. Hence, a general rule that companies with abnormal profits should be excluded may. be in tune with the principles enunciated in OECD guidelines but cannot be said to be in tune with Indian TP regulations. However, if there are specific reasons for abnormal profits or losses or other general reasons as to why they should not be regarded as comparables, then they can be excluded for comparability. It is for the Assessee to demonstrate existence of abnormal factors. 36. In the present case factors for abnormal profits have not been highlighted by the Assessee. In such circumstances it is not possible to accept the submission of the Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X
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