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2015 (6) TMI 677 - ITAT KOLKATA

2015 (6) TMI 677 - ITAT KOLKATA - TMI - Transfer pricing adjustment - ALP - selection of comparables - Held that:- 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 .....

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by the TPO is that of software development unlike that of the assessee company which is engaged in the business of BPO services. The aforesaid comparable may be excluded for the purpose of benchmarking the armís length price of the international transactions entered into by the assessee. The software development company has a completely different functional profile as compared to a company engaged in BPO services. The risk undertaken and the assets employed by a software development company cann .....

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ines.In view thereof the matter is restored to the file of the AO for making fresh search of comparables in view of the position of law enunciated in the present decision. - Decided in favour of assessee statistical purposes. - I.T.A No.695/Kol/2011 - Dated:- 11-6-2015 - Hon ble Shri Mahavir Singh & Hon ble Shri B.P.Jain,JJ. For the Petitioner: Shri R.N.Bajoria, Sr.Advocate, Shri Paras Shah & Shri Akhilesh Gupta, Advocate For the Respondent : Shri Vijay Kumar, CIT ORDER Per : B.P.Jain, A .....

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That on the facts and in the circumstances of the case, the Transfer Pricing Officer III, Kolkata (hereinafter referred to as Ld TPO ), Dispute Resolution Panel, Kolkata (hereinafter referred to as Ld. Panel ) and consequently the Income Tax Officer, Ward 2(2), Kolkata (hereinafter referred to Ld AO ) has erred in making an adjustment of ₹ 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 .....

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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 contemporaneous documentation . Accordingly, the Ld.TPO has wrongly pen .....

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rejecting the transfer pricing analysis of the assessee to justify the arm s length nature of its international transactions on the ground that the assessee had used multiple year data while performing its benchmarking analysis and did not give consideration to the volume of sale. 7. That on the facts and in the circumstances of the case,, the Ld. TPO, Ld.Panel and consequently the Ld. AO has erred by determining the arm s length mark-up based on the data for financial year 2006-2007 to the exc .....

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rice of international transactions of the assessee with the AE. 9. That on the facts and in the circumstances of the case, the Ld. TPO, Ld.Panel failed to adhere to the principles of natural justice by not addressing to the submission of the assessee and had conducted the proceedings on a complete misunderstanding and wrong interpretation of the facts. 10. That on the facts and in the circumstances of the case, the Ld. AO has erred in deducting ₹ 39,451/- from the export turnover as expens .....

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0B totaling to ₹ 4,54,183/-, by deducting expenses amounting to ₹ 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 f .....

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service provider in relation to some of Acclaris Inc s clients. The BPO services include various types of services including recruitment services, financial services and routine back office services like indexing and enrollment for clients. The assessee works as an IT enabled back office services provider which provides back office services to the client. The assessee does not own any intangibles interest in the intangibles owned by Acclaris Inc. and is only a service provider. Acclaris Inc., on .....

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ity and performance in the market. The assessee is entitled to seek compensation appropriate to the functional performance and capital employed in the business. 3.1. During the Assessment Yr. 2007-08, the assessee filed its return of income, declaring a taxable income of ₹ 1,08,583/-, on 16.01.2007. The return was duly processed u/s 143(1) of the Act and the case was selected for scrutiny for assessment by issuing notice u/s 143(2) of the Act and section 142(1) of the Act. As the assesse h .....

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fit/total cost) was benchmarked by Transactional Net Margin Method. (TNMM). According to the assessee, it had earned a profit of 15.02% for the relevant assessment year and as per the 14 comparables selected by the assessee with TP study, the average margin determined was 11.28%. Therefore, it was the case of the assessee that international transactions entered into by the assessee with its AE were at arms length. The TPO vide its order dated 29th October, 2010 u/s 92CA(3) of the Act, made an up .....

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rores to ₹ 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 Co .....

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10,73,26,265 declared by the assessee. Thus the upward adjustment made was ₹ 1,31,57,697. 3.6. AO relied upon the TPO s order and passed a Draft assessment order by making Transfer price adjustment of ₹ 1,31,57,697/-. The second addition made by AO was with respect to disallowance of exemption u/s 10A and 10B of the Act totaling to ₹ 4,54,183/- by deducting expenses amounting to ₹ 48,84,548/- which was incurred on account of expenses in foreign currency and connectivity .....

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profile and cannot be compared with the assessee. The objection regarding the same is taken in ground no.2. Secondly, the two other comparables namely Galaxy Commercials Ltd. and ICRA Online Ltd. were of a very high profit margin of 23.53% and 30.35% and should be excluded. The aforesaid objections are referred to in grounds 2 and 3. The ld. Sr. Counsel submits if these comparables are excluded, the assessee s international transactions would be at arm length and no upward revisions would be re .....

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ced 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 .....

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r to judicial precedents on the aforesaid issue to fortify our reasons to exclude the comparable stated above. In the case of Pentair Water India (P) Ltd vs ACIT (2014)47 Taxmann.com 132 (Panaji), the ITAT Panaji Bench has held as under :- Maple Solutions Ltd :- While deciding the appeal of the assessee for A.Y.2006-07 in ITA Nos.2&5/PNJ/2013, this tribunal has excluded this company out of the comparables by holding as under vide its order dt.17.4.2014 : Maple esolutions Ltd. : TPO has consi .....

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tment. In view of the question mark on the reputation of its owners, albeit for earlier years, it would be unsafe to take their results for comparison of profitability of the assessee. In A.Y. 2006-07 we noted that the profit margin has been taken by the TPO at 28.75%. When the assessee went in appeal before CIT(A), CIT(A) has excluded this company for the purpose of comparison. No cogent material or evidence was brought to our knowledge by the ld.DRhow this company is not tainted one. The decis .....

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oftware Enterprises Ltd., CArborundum Universal Ltd., Mukand Engineers Ltd., Tricom India Ltd., Ultramarine and Pigment Ltd and Tata Services were included as comparables as these companies were engaged in ITES activities. While doing so, the TPO did not differentiate between voice based and non-voice based BPO units on the ground, inter-alia that such a classification has not been demonstrated and in any case TNMM irons out difference in functions. It was further submitted that the functions pe .....

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T(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 comp .....

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voice based BPO as part of the business -do- 5. Ultramarine & Pigments Ltd. Non-voice based BPO as part of the business -do- 6. Tata Services Tata Management Training Center and other services to Tata group companies -do- 9.3. When we examine the facts of the case in the light of aforesaid conclusion, it is seen that none of the comparables selected by the TPO is shown to have the same business of voice based BPO as in the case of the assessee. C.S.Software Enterprises Ltd. is conducting the .....

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ness models are not comparable. Therefore, we do not find any reason to disturb the order of the ld. CIT(A)in this matter. In view of the reasons stated above and judgments referred to above, we have no hesitation to exclude the comparable i.e. Maple E-solutions from the list of comparables chosen by the TPO. 6.3. As regards Indusind Information Technological Limited, it is the case of the assessee that the business model of the comparable chosen by the TPO is that of software development unlike .....

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compared to 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 ave .....

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sessee 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 assessee had to incur considerable expenditure on research and development and that the assessee s financials should be compared to software development companies and not with companies in the area of BPO, KPO etc. 8. It is seen that it is against the above objections raised by the ass .....

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at the business model of the assessee was based more on turnkey projects, in which case cost overruns would have to be borne by the assessee-company. In the facts and circumstances of the case, we are not in a position to accept the PLI at 25.44% determined by the TPO on the ratio of operating profit to operating cost. This against the PLI returned by the assessee company at 3.5%. Therefore, we do not approve the upward adjustment of ₹ 4,33,80,146/- made by the Assessing Officer to its ful .....

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l Service Centers (India)Pvt.Ltd. in ITA No.3774/Mum/2011 vide order dated 09.11.2011 the ITAT Mumbai Bench has held as under :- 30. The assessee in its transfer pricing study considered transactional net margin method (hereinafter called TNMM ) as the most appropriate method with NCP margin as the profit level indicator to benchmark its international transactions with AEs. The assessee conducted analysis for determining the ALP of international transactions pertaining to the provisions of back .....

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the adjustments to the ALP amounting to ₹ 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 Informati .....

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counts 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. Coming to the cases of Cepha Imaging Private Limited and Asian Cerc Information Technology Ltd. (Seg.), we find that these companies are engaged in providing software development services as is evident from their annual reports available on pages 52 onwards and 64 onwards of the paper book. Thus .....

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ties. This fact is evident from pages 62 of the paper book, which makes it incomparable with the assessee. 6.7. In ACIT vs M/s. Hapag Lloyd Global Services Private Limited in ITA No.8499/Mum/2010 vide order dated 28.02.2013 similar issue arose wherein ITAT, Mumbai Bench has held as under :- 4.1. The TPO observed that this company was in ITES both as per Board s Notification and also D&B Websites. As the assessee had not considered this case, the TPO held it as comparable and included it in t .....

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mbai Bench of the tribunal in the case of ACIT v.Mearsk Global Service Centres (India) Private Limited [(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 As .....

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t 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 onwards and 64 onwards of the paper book. We find that the finding recorded by the learned CIT(A) in the impugned order that Cepha Imaging Private Limited was mainly engaged in export of software tallies with t .....

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econd limb of the arguments of the ld. Sr.counsel for the assessee is concerned, it is contended that the two comparables out of the five comparables chosen namely Galaxy Commercial Ltd. And ICRA Online Limited are of high profit margin (OP/TC) and therefore should be excluded from the list of comparables. The profit margin declared by the assessee in its TP study is 15.2% and these two comparables objected to by the assessee have a profitability of 23.53% and 30.35% respectively. 8. Before adve .....

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characteristics of the property transferred or services provided in either transaction ; (b) The functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) The contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) .....

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les 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 .....

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the other hand, have enunciated the principle of quartile method for calculation of ALP, wherein the comparables that fall in the extreme quartiles get excluded and the middle quartiles are considered for benchmarking the transactions. The approach of the TPO by selecting the band of PLI between 10% and 50% is completely arbitrary and has no basis for reasons stated above. The selection of comparables by the TPO has led to arbitrariness wherein the loss making companies are excluded and compara .....

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igh and deserves to be rejected on this ground, as not within the parameters of comparability. In this regard, reference was made to the decision of Special Bench of ITAT Chandigarh in the case of Quark Systems Pvt. Ltd. (supra) besides several other tribunal decisions laying down identical proposition. Further it was submitted that Visual Soft Technologies Ltd. merged with Megasoft Ltd. w.e.f. 01.10.2006. Therefore the book results in the year in which the merger has taken place cannot be taken .....

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the Special Bench had to deal with cases where the results were abnormal. The special Bench observed as follows: "Even if the taxpayer or its counsel had taken Datamatics as comparable in its T.P. audit, the taxpayer is entitled to point out to the Tribunal that 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 positi .....

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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 1.5 times of the .....

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point that has been emphasized is that when the margins of comparable companies are either extremely low or high, the approach should be to eliminate both and not consider only the high or low margin comparables as it suits either the TPO or the Assessee. 34. As far as the provisions of the Act are concerned, they lay down that the comparable companies should be functionally comparable to the tested party. There are no specific standards of comparability on the basis of abnormal profits or loss .....

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ting) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the m .....

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tile 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 b .....

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