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2015 (6) TMI 677

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..... e aforesaid comparable may be excluded for the purpose of benchmarking the arm’s 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 cannot be compared to a BPO company. 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 comparables only in the range of 10% to 50% are selected. The benchmarking made by the TPO is not as per the principles governing Indian Transfer Pricing guidelines regulations or even the OECD guidelines.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. .....

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..... mstances of the case, the Ld. TPO, Ld.Panel and consequently the Ld. AO has erred in applying the turnover filter with a very small range of turnover thereby rendering the comparative study defective. 6. That on the facts and in the circumstances of the case, the Ld. TPO, Ld.Panel and consequently the Ld. AO has erred in 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 exclusion of prior year date [as contemplated under Rule 10B(4) of the Rules]. 8. That on the facts and in the circumstances of the case, the Ld. TPO, Ld.Panel and consequently the Ld. AO held that proviso to section 92C(2) of the Act (as per Finance Act 2001) is not applicable to the assessee, instead proviso to section 92C (2) of the Act (as per Finance Act 2 .....

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..... 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 the other hand, provides a range of BPO services to its clients with significant experience in managing people, process and technology, Acclaris Inc. owns the intellectual property rights (know-how copyrights etc.) and other commercial and marketing intangibles (brand names, trade marks etc.) and is involved in complex operations of developing proprietary technologies and marketing of the same. Acclaris Inc. also bears all the significant business and entrepreneurial risks of product acceptability 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 assessm .....

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..... . Galaxy Commercials Ltd. 23.53% 23.53 2. ICRA Online Ltd. 30.35% 30.35% 3. Maple Esolutions Ltd. 34.92% 34.92% 4. Professional Management Consultants Pvt. Ltd. 13.59% 13.59% 5. Indusind Information Technology Ltd. 43.22% 43.22% Average 29.12% 3.5. The TPO on the basis of the aforesaid comparison calculated the arms length price of international transactions of the assessee for rendering services to its AE for BPO services to be at ₹ 12,04,93,962 instead of ₹ 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 exemptio .....

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..... le 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 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 considered Maple eSolutions Ltd. as a comparable and computed the margin in respect of this company @33.66%. We noted that the Hon ble Delhi Tribunal in the case of ACIT vs CRM Services India Pvt. Ltd., 14 taxmann. Com 96 has held that this company could not be selected as comparable for ITES companies as the management of this company was tainted one as the Directors of the company were .....

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..... nd 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. Name Nature of Business Remarks 1. C.S.Software Enterprises Ltd. Software Development Not engaged in voice based call centre service, hence rejected 2. Carborundum Universal Ltd. Manufacturer of coated and bonded abrasive -do- 3. Mukand Engineers Mainly into steel -do- 4. Tricom India Ltd. Non-voice based BPO as part of the business -do- 5. .....

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..... 47 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 ₹ 25 crores and therefore its turnover base for the purpose of arriving at comparables should be taken in the range of ₹ 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 ₹ 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 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 obje .....

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..... ade 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 ₹ 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 I .....

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..... the said company was functionally incomparable as it was mainly engaged in software and application development. The learned CIT(A) considered the Annual report of this company and observed that it referred mainly to the income from export sales of software as against the assessee s business of ITES. Accordingly this case was excluded from the list of comparables. 4.2. The ld. AR mainly relied on the decision of the Mumbai 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 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 ins .....

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..... 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) 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 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 .....

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..... 31. The learned DR relied on the order of the TPO and the DRP on this aspect. ~ 32. We have considered the rival submissions. First we will consider the submission of the Assessee that companies with abnormal margins should not be regarded as comparable. In the case of Quark Systems Pvt. Ltd. (supra), 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 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 wh .....

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..... tions 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 markets are wholesale or retail. 35. There is therefore no bar to considering companies with either abnormal profits or abnormal losses as comparable to the tested party, as long as they are functionally comparable. The OECD guidelines and in US TP regulations, this question may not arise at all because those regulations advocate the quartile method for determining ALP. Indian 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 co .....

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