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Copal Research India Pvt. Ltd. Versus Income-tax Officer, Ward 3 (4) , New Delhi.

2015 (7) TMI 561 - ITAT DELHI

Transfer pricing adjustment - selection of comparable - Coral Hub Limited - Held that:- In the case of Mercer Consulting (India) Pvt. Ltd. (2014 (7) TMI 715 - ITAT DELHI) also the company was engaged in rendering IT and IT enabled services to its AEs. This company was providing service in the nature of application development, quality assurance, application maintenance, implementation services, helpdesk services, administrative processing, contribution processing, health and benefits processing .....

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t comparable to coral hub particularly on account of different models adopted by two companies for carrying out its functions. We, accordingly, direct the AO to exclude this comparable.

Eclerk Services Ltd. - primarily assessee was engaged in providing primary data for various field of activities but not complete business solutions. Therefore, this company could not be treated as comparable for the purpose of determining ALP of the transactions between the assessee company with its AE .....

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ot be done by AO unless there was direction by ld. DRP. The AO could not vary the margins as computed by TPO in his order, because once reference has been made by AO under section 92CA(1), then in view of the provisions of section 92CA(4), the AO is required to compute the total income of the assessee under sub-section (4) of section 92C in conformity with the ALP as determined by the TPO. Therefore, unless DRP has given any specific direction altering the ALP as determined by TPO, the AO does n .....

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d with section 144C(3) of the I.T. Act, 1961. 2. Brief facts of the case are that the asesssee company, in the relevant year, was engaged in the provision of information Technology ( IT ) enabled back office support services in the nature of customized business/ financial research support to Copal Group. The assessee had an ITES agreement with Copal Group under which it provided the aforementioned services. It primarily provided back office support for Copal Group s global operations through cus .....

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following international transactions with its associated enterprises: S.No. Description of the transactions Amount In rupees 1. Provision of IT enabled back office support services 424,897,981 2.2. The benchmarking analysis in regard to these international transactions was done as under Particulars Provision of ITeS Most appropriate method Transactional Net margin method ( TNMM ) PLI used Operating Profit ( OP )/ Total Cost ( TC ) No. of comparables 14 Comparables mean margin (working capital a .....

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ther operating income (other than 'manufacturing' and 'trading' income) to sales greater than 50% were accepted; - Companies having research & development costs to sales less than 3% were accepted; - Companies having net fixed assets to sales less than 200% were accepted; - Companies having average sales less than INR 1 crore were rejected; Companies with net worth less than zero were rejected; and - Companies having advertising, marketing and distribution costs to sales less .....

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6. Jindal Intellicom Ltd. Prowess -5.90% 7. Sparsh BPO Services Ltd. Prowess 4.02% 8. Omega Healthcare Management Services Pvt. Ltd. Capitaline 15.43% 9. In House Productions Ltd. (Healthcare segment) Seg-P 6.51% 10. Spanco Ltd. (BPO Segment) Seg-P 0.73% 2.6. However, ld. TPO did not accept the economic analysis and carried out fresh search and determined the PLI at 30.99% as under: S. No. Company OP/TC as per the TPO order (using data for FY 2008-09) Status 1. Aditya Birla Minacs Worldwide Limi .....

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adjustment of ₹ 5,07,62,260/-. 2.8. Ld. TPO also issued a show cause notice dated 2-12-2012 pointing out that as per examination of the balance-sheet, receivables were taken which implied that the payment for the invoices raised by the assessee had not been received within the stipulated time as provided in service agreement with AE. Accordingly, assessee was required to furnish the time period for payment as per service agreement with AE. However, instead of charging penal interest, the d .....

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alia, on the ground that receivables was not an international transaction which warranted benchmarking and further objected to imputing the interest rate of 16% for the delay in receipt of payment. However, ld. TPO did not accept and after detailed discussion imputed the interest @ 15.77% and made an adjustment of ₹ 18,53,019/-. 2.9. Accordingly, the total adjustment made by ld. TPO was ₹ 5,26,15,369/-. 2.10. The assessee filed objections before ld. DRP, who issued directions dated .....

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set of comparables as under: S. No. Company OP/TC as per the TPO order (using data for FY 2008-09) 1. Aditya Birla Minacs Worldwide Limited 23.88% 2. Coral Hub Limited 36.93% 3. Eclerx Services Ltd. 57.7% 4. Infosys BPO Limited 24.42% 5. Microgenetic Systems Ltd. 21.47% 6. Jindal Intellicom Systems Ltd. -7.36% Arithmetic Mean 26.17% 2.11. Being aggrieved with the assessment order read with order passed u/s 154, the assessee is in appeal before us and has taken following grounds of appeal: 1. Tha .....

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rtaken by the appellant do not satisfy the arm's length principle envisaged under the Income-tax Act 1961 ('Act'). In doing so the Ld. DRP has grossly erred in agreeing with the Ld. TPO's action of; 2.1. not appreciating that none of the conditions set out in section 92C(3) of the Act are satisfied in the present case; 2.2. ignoring the fact that the appellant is entitled to tax holiday under section 10A of the Act on its profits and therefore would not have any untoward motive o .....

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Appellant in the TP documentation and holding that current year (i.e. FY 2008-09) data for comparable companies should be used despite the fact that the same was not necessarily available to the Appellant at the time of preparing its TP documentation; 2.5. rejecting comparability analysis in the TP documentation based on application of the following additional revised filters in determining the ALP: 2.5.1. exclusion of companies having different financial year ending (i.e. not March 31, 2009); .....

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king a low risk captive unit such as the appellant (disregarding judicial pronouncements on the issue) 2.7. including certain companies that are not comparable to the appellant in terms of functions performed, asset employed and risks assumed; 2.8. excluding certain companies on arbitrary/ frivolous grounds even though they are comparable to the appellant in terms of functions performed, assets employed and risks assumed; 2.9. ignoring the business/ commercial reality that since the appellant is .....

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tion 92C(2) of the Act; and 2.11. not allowing the appellant the benefit of working capital adjustment 2.12. disregarding judicial pronouncements in India in undertaking the TP adjustment. 3. Imputing interest on receivables from the Associated Enterprise CAE') beyond the credit period of the appellant on an ad hoc basis of credit period and interest rate, while completely disregarding the detailed submissions made by the appellant explain that such adjustments are not mandated under the fac .....

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nt in the succeeding AY 2010-11 ; 5. The Ld. AO erred in not verifying the factual errors in computation of the operating margins of the comparables and accordingly re-computing the Arm's Length Price (,ALP') accordingly while passing the order, pursuant to the directions of the Ld. DRP; 6. The Ld. DRP erred in confirming the Ld. TPO/AO's action in proposing to initiate penalty under section 271(1)(C) of the Act. 7. That the Ld. DRP has erred both on facts and in law in confirming th .....

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ny has its own IPRs and Know-how and abnormally high/ volatile profit margin. 5. Ld. counsel pointed out that this company is primarily out sourcing from its AEs and outsource parties constitute 90% of the total operating cost. He pointed out that the employees cost is only 2-3% of the total operating expenses whereas in asessee s case the employees cost is more than 55% as is evident from PB 73 wherein the personnel expenses have been ₹ 28,11,39,163/- out of ₹ 44,65,20,952/- being t .....

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TIOL-322-ITAT-Mumbai). 6. Ld. Standing Counsel submitted that it is to be examined as to what services are rendered by assessee. He referred to pages 224 to 361 of the PB, containing annual report and pointed out that the business model of this comparable was as under: Data Capture & Digitization Data Conversion E-Publishing Digital Library Solutions Online Books Stores Classic Books Publishing Fund Accounting Services. 6.1. He further referred to page 107 of the appeal set and pointed out t .....

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he case of Deloitte consultant Pvt. Ltd., wherein it has been held as under: It appears that the VITL has outsourced the manpower and the cost of outsourcing appears to have been included in the other heads of the expenditure instead of wages- employee cost. Moreover, the intangibles will not materially affect the price of profit earning. By outsourcing the manpower, the VITL would have incurred more cost compared to the assessee company, thus resulting in lesser operating profit. But, having co .....

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mpany. 7. We have considered the rival submissions and have perused the record of the case. The ITAT Delhi Bench in the case of Mercer Consulting (India) Pvt. Ltd. Vs. DCIT (ITA no. 966/Del/2014) the Tribunal vide its order dated 6-6-2014 has observed as under: 12.3. Reverting to the facts of the extant case, we find that the position as obtaining in the present case is rather simple inasmuch as the assessee, having originally included this case in the list of comparables, made a categorical cla .....

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stitute 90% of the total operating cost in this case. On a specific query, the Id. DR admitted that our assessee is engaged in the business of doing activities at its own without any outsourcing. This crucial factor, having a greater bearing on the profitability, makes it distinguishable from the assessee. The Mumbai Bench of the Tribunal in the case of Hapag Lloyd Global Services (supra) has held that Vishal Information Technologies Ltd. cannot be considered as comparable because of the overwhe .....

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sidered opinion that this case is required to be excluded from the list of comparables. We order accordingly. 7.1. We find that in the case of Mercer Consulting (India) Pvt. Ltd. (supra) also the company was engaged in rendering IT and IT enabled services to its AEs. This company was providing service in the nature of application development, quality assurance, application maintenance, implementation services, helpdesk services, administrative processing, contribution processing, health and bene .....

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f assessee is not comparable to coral hub particularly on account of different models adopted by two companies for carrying out its functions. We, accordingly, direct the AO to exclude this comparable. II. Eclerk Services Ltd. 8. As regards Eclerk Services Ltd., the asesssee s contention was that there was functional dissimilarity with assessee s functions, as it was a knowledge process outsourcing company engaged in providing consulting services, process outsourcing; process re-engineering and .....

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previous year. Further, there had been a rise of 50% in the intangibles in the nature of computer software from FY 2007-08 to FY 2008-09 and the amount of intangible as a percentage of total fixed assets was 10%, whereas the assessee company did not own any interest in the intangibles (technical or marketing). 8.1. Ld. TPO did not accept the assessere s contention and relied on CBDT Circular SO 890(E) dated 26-9-2000, which had given a detailed list that could be claimed under ITES for the purp .....

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yd/2012 (AY 2008-09), TS-140-ITAT- 2013 (Hyd)-TP] - Capital IQ Information Systems (India) Pvt. Ltd. (ITA no. 1961/Hyd/2011, ITAT Hyderabad) - Zavata India Pvt. Ltd. (ITA no. 1781/Hyd/2011, TS-156-ITAT. - Maersk India Pvt. Ltd. Vs. ACIT (ITA no. 7466/Mum/2012, ITAT Mumbai). 10. Ld. Standing counsel reiterated the submissions made with regard to Coral Hub Ltd. 11. We have considered the submissions of both the parties and have perused the record of the case. We find that in the case of Maersk Glo .....

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is available in the form of annual report for financial year 2007 -08 placed at page 166 to 183 of the paper book. A perusal of the same shows that the said company provides data analytics and data process solutions to some of the largest brands in the world and is recognized as experts in chosen markets-financial services and retail and manufacturing. It is claimed to be providing complete business solutions by combining people, process improvement and automation. t is claimed to have employed .....

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ower better decisions. M/s eClerx Services Pvt. Ltd. is also claimed to have a scalable delivery model and solutions offered that include data analytics, operations management, audits and reconciliation, metrics management and reporting services. It also provides tailored process outsourcing and management services along with a multitude of data aggregation, mining and maintenance services. It is claimed that the company has a team dedicated to developing automation tools to support service deli .....

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mainly engaged in providing low-end services to the group concerns. 11.1. We find that the assessee also cannot be said to have relatable degree of comparability because primarily assessee was engaged in providing primary data for various field of activities but not complete business solutions. Therefore, this company could not be treated as comparable for the purpose of determining ALP of the transactions between the assessee company with its AEs. We, accordingly, direct that this company be ex .....

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1-1-2013. However, during the course of assessment proceedings, the ld. TPO had taken the margin at 23.88% on the basis of safe Harbour Rules instead of .5%. He submitted that no opportunity was provided to assessee for varying the PLI and no basis for the same has been pointed out. 14. Ld. counsel referred to page 296 of the PB and pointed out that assessee had computed the PLI at -2.52% in the TP report. 15. As regards Microgenetic Systems Ltd., ld. counsel referred to page 122 of the PB and p .....

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