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2015 (7) TMI 772 - ITAT BANGALORE

2015 (7) TMI 772 - ITAT BANGALORE - TMI - Transfer pricing adjustment -DRP and AO/TPO rejecting the detailed benchmarking analysis conducted by the appellant and embarking on a fresh search for comparables - adopting the financial data for a single year(i.e the financial year 2007-08) of the comparable as against multiple year data considered by the appellant - Held that:- Eclerx Services Ltd - Having regard to the nature of the services provided by the assessee to its group concern in compariso .....

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of providing ITES to its associated enterprise. Accordingly, we direct the AO/TPO to exclude eClerx Services Ltd., from the set of comparables selected by the TPO.

Mold Tex Technologies Ltd. - nature of the functions performed by the Mold Tek which have been examined by the Special Bench in M/s Maersk Global India Pvt.Ltd. [supra] and found is not compared with the low end ITES service provider Co. we hold that this Co. is functionally not comparable with that of the assessee. Accordi .....

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that:- if the communication expenses are excluded from the export turnover then, the same should also be excluded from the total turnover in view of the judgment of jurisdictional High Court in the case of M/s Tata Elxsi Ltd. reported in [2011 (8) TMI 782 - KARNATAKA HIGH COURT ] - Decided in favour of assessee. - IT(TP)A No.1685(B)/2012 - Dated:- 17-7-2015 - Shri Vijay Pal Rao and Shri Jason P Boaz, JJ. For the Petitioner : Shri Ajithkumar Jain, CA For the Respondent : Shri R.K.Mishra, CIT-III .....

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e of equity and natural justice. Transfer pricing 2. The Hon ble DRP and the ld.AO/TPO have erred in law and on facts in rejecting without appreciate reasons, the detailed benchmarking analysis conducted by the appellant and embarking on a fresh search for comparables. 3. The Hon ble DRP and the ld.AO/TPO erred in fact and in law ij determining the ALP by adopting the financial data for a single year(i.e the financial year 2007-08) of the comparable as against multiple year data considered by th .....

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tra ordinary events/business restructuring abnormal fluctuation in margins, exceptional year, lower employee cost levels, fails TPO s own filters etc. 6. The Hon ble DRP and the ld.TPO/AO has also erred in selecting companies which have earned super profits and super growth not in line with the industry even though a filter was applied by the learned TPO to reject loss making and declining revenue companies. 7. The Hon ble DRP and the ld.AO/TPO erred in rejecting certain companies selected in th .....

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ld.AO/Hon ble DRP have erred in upholding the ld.TPO s action of not making further downward margin adjustment to consider the risk, differentials between the appellant and the comparable companies, thereby rejecting the risk adjustment workings provided by the appellant. 11. The ld.TPO erred in computing the operating margins of the comparable co. at higher levels and determining the operating margin of the appellant to be lower than the margin actually earned by the appellant, and the Hon ble .....

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The Hon ble DRP/ld.AO have erred in law and on facts in not considering foreign exchange gain/loss and provision for bad debts as operating items while computing the margins for benchmarking. 14. The Hon ble DRP and the AO/TPO have erred in fact and in law in applying the provisions of TP to the appellant without appreciating the fact that the appellant was entitled to 100 percent deduction of profits u/s 10A during the relevant year and therefore, there would be not be any motive to shift prof .....

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se f computation of relied under section 10A of the Act. Disallowance under section 40a(ia) of the Act. 17. The Hon ble DRP ld.AO has erred in disallowing an amount of ₹ 7,42,22,683/- under section40(a)(i) of the Act and upholding conclusion that the appellant has failed to deduct tax at source on payments made to certain non- resident vendors which are in the nature of royalty fees for technical service (FTS) and were subject to tax deduction at source (TDS) under provisions of Chapter-XV .....

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dismissed as not pressed. Accordingly, ground no.2 to 4, 6 to 14 and 17 are dismissed being not pressed. Thus, the only grounds in the appeal of the assessee are left for our consideration and adjudication are ground no.5,15 & 16. 5. Ground no.5 regarding the transfer pricing adjustment made by the TPO and confirmed by the DRP. The assessee company is engaged in the business of export of software development services and ITEs Services. There is no dispute as far as the international transac .....

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telligence group, human capital management etc. and ii) Software Development Services 6. The AE group of assessee is a goldman investment banking securities and investment management group that provides a wide range of services to worldwide to a diversified client sake. The assessee benchmark its transaction in ITES segment by selecting 13 comparables and using 3 years data. The TPO rejected 8 comparables selected by the assessee and added 15 more comparables for determining the ALP in respect o .....

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Ltd (Earlier known as Vishal Information Tech.Ltd) 50.68 7 Cosmic Global Ltd 23.30 8 Crossdomain Solutions Ltd 27.03 9 Datamatics Financial Services Ltd (Seg.) 29.11 10 E4e Halthcasre Solutions Ltd( Formerly known as Nittany Outsourcing Services Pvt.Ltd) 18.54 11 Eclerx Services Ltd 58.80 12 Genesis International Corpn.Ltd 47.40 13 Infosys BPO Ltd 19.66 14 IServices India Pvt.Ltd 10.77 15 Jindal Intellicom Pvt.Ltd -10.29 16 Mold tex Technologies Ltd 96.66 17 R Systems International Ltd (Seg.) 4. .....

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bal Ltd 23.30 3 Spanco Ltd (SEg.) earlier known as Spanco Telesystems & Solutions Ltd) 8.81 4 Allsec Technologies Ltd -13.29 5 R Systems International Ltd ()Seg.) 4.30 The TPO also allowed the working capital adjustment at 0.74% while making adjustment on account of ALP. The TPO worked out the assessee s operating margin at 16.62% and accordingly, proposed an adjustment of ₹ 30,27,18,666/- after allowing the working capital adjustment at 0.72%. The assessee objected the proposed adjust .....

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assessee has confined his argument only in respect of 2 companies namely Eclerx Services Ltd and Mold Tek Technologies Ltd which are at sl.no.11 & 16 of the list of comparables selected by the TPO. The learned AR submitted that the assessee is low end ITES providing Co. whereas the Eclerx Services Ltd is a high end service providing Co. and therefore, the said Co. is in the services of Knowledge Process Outsourcing (KPO). He has referred the annual report of the said Co. at page-135 of the p .....

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o. with industry specialized services for meeting complex clients needs. The Co. has categorically explained that this Co. is a data analytic KPO service provider specializing in two business verticals- Services and Retail and Manufacturing. Apart from this, the learned AR has pointed out that the Eclerx (supra) has also acquired UK based Co. namely; M/s Ignetica Travel Solutions Ltd., on July 2007. This acquisition has given the co. an entry platform into a new vertical i.e travel and hospitali .....

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e Eclerx Services Ltd in the list of comparables however, while passing the final order dated 30.01.14 by the TPO Eclerx was excluded from the final set of comparables selected by the TPO. The learned AR submitted for the AY: 2010-11 the TPO itself had excluded this said Co. by treating the same as not comparable with the assessee. He has referred the show cause notice dated 1.11.2013 at page- 589 of paper book no.2 and the TPO order dated 30.1.13 at page no.602 of paper book no.2 in support of .....

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assessee regarding low end services and high end services was duly considered by the TPO as well as by the DRP and it was found not acceptable because f the reasons that all the comparables selected by the TPO are providing ITES services. Thus, the assessee as well as the comparable selected by the TPO are in the same business activity of ITES and merely because of the nomenclature of KPO given by some of the Co s in their annual report could not change the real nature of services and business a .....

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ITES pertaining to data processing and in the nature back end service support to the AE group of Co s. The assessee claimed that the assessee is in low end data processing services which has not been disputed by the TPO while determining the comparables and ALP by using the mean margin of the 20 comparables selected by the TPO. There is no dispute regarding the most appropriate method being TNM method adopted by the assessee as well as the TPO. We find that the comparability and nature of servi .....

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nized 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. It is claimed to have employed over 1500 domain specialists working for the clients. It is claimed that a eClerx is a different company with industry specialized services for meeting complex client needs, data analysis KPO service provider specializing in two business verticals financial services and .....

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cess outsourcing and management services alongwith multitude of data aggregation, mining and maintenance services. It is claimed that the company has a team dedicated to developing automation tools to support delivery. These software automation tools increase productivity allowing customers to benefit from further cost saving and output gains with better control over quality. Keeping in view the nature of services rendered by M/s eClerx Services (P)Ltd and its functional profile, we are of the v .....

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Ltd. it is difficult to find out any relatively equal degree of comparability and the said entities cannot be taken as comparables for the purpose of determining ALP of the transactions of the assessee company with its AEs. We, therefore, direct that these two entities be excluded from the list of 10 comparables finally taken by the AO/TPO as per the directions of the DRP. 10. Thus, it is clear that the functional profile of eClerx Service (P)Ltd (Supra) was examined by the Special Bench and it .....

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lerx Services Ltd, as included by TPO, we found that this company is Knowledge Process Outsourcing (KPO) engaged in providing data analysis and data process solutions. Online operation support, customer relationship management support, data de-duplication services etc. Since functionally, it is different from assessee-company, DRP was not justified in not excluding the same from the list of comparables . 11. Having regard to the nature of the services provided by the assessee to its group concer .....

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ed and therefore, the said Co. cannot be compared with the assessee Co. for the purpose of determining ALP in respect of international transactions of providing ITES to its associated enterprise. Accordingly, we direct the AO/TPO to exclude eClerx Services Ltd.,(Supra) from the set of comparables selected by the TPO. Mold Tex Technologies Ltd., 12. The learned AR of the assessee has referred to the director s report of M/s Mold Tex Technologies Ltd., and submitted that this Co. was not having an .....

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n the different nature of activity and functions which is not comparable with the assessee. In support of his contention he has relied upon the decisions of the Special Bench of Mumbai (Supra) The learned AR has pointed out that this Co. is declaring only one segment operating revenue therefore, this cannot be compared with the assessee. 13. On the other hand, learned DR has relied upon the orders of the authorities below and submitted that this Co. is in the field of ITES and therefore, functio .....

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mpany was pioneer in structural engineering KPO services and its entire business comprised of providing only structural engineering services to various clients. Further, information of M/s Mold Tek Technologies Ltd available on their website is furnished in the form of printout at pp.158 to 165 of the paper book and a perusal of the same shown that it is a leading provider of engineering and design services with specialization in civil, structural and mechanical engineering services. It is state .....

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lopment services with experience in turning them into an effective graphic design representation and creating dynamic and graphic rich web applications from IT specs, design prints etc. Keeping in view this information available in the annual report of M/s Mold Tek as well as on its website, we are of the view that the said company is mainly involved in providing high end services to its clients involving higher special knowledge and domain expertise in the field and the same cannot be taken as .....

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October, 2007 and April 2007 respectively. It is also pertinent to note that while working out the operating margin of the said company provision for derivative loss of ₹ 6.43 Crores made by Mold Tek Tech.Ltd. was excluded by the AO treating the same as non-operating expenses whereas in the case of Rusabh Diamonds Vs Asst.CIT(reported at (2013) 155 TTJ (Mum.) 386 (2013) 89 DTR (Mum.)(Trib.) 57 Ed) it was held by the Division Bench of this Tribunal that the gain or loss arising from the fo .....

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taken as comparables for the purpose of determining ALP of the transactions of the assessee company with its AEs. We, therefore, direct that these two entities be excluded from the list of 10 comparables finally taken by the AO/TPO as per the directions of the DRP. 15. The Special Bench has examined the functional comparability of this Co. with that of ITES low end service providing assessee and found that this Co. is rendering web designing and development of services with expertise in turning .....

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r view in para-7 as under; 7. By applying the arithmetic mean of 30.10% an adjustment of ₹ 10,39,54,664/- was sustained by DRP. Out of the comparables taken by the DRP, learned AR has contended against three companies namely; Mold Tek Tech.Ltd. Exclerx Service :Ltd and Acropetal Tech.Ltd which were alleged to be functionally different from the assessee company being a low end back office support service provider. We found that Mold Tek Tech.Ltd provides KPO services in the field of enginee .....

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y, we do not find any justification in the order of DRP for not excluding Mold Tek as comparable which is a Knowledge Processing Company. Thus, the DRP was not justified in the comparing the same with the assessee which is functionally different insofar as assessee is engaged in providing low end back office support services . 16. In view of the above facts and nature of the functions performed by the Mold Tek which have been examined by the Special Bench and found is not compared with the low e .....

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on this account. In view of the statement and plea of the learned AR we direct the AO/TPO to re-compute the ALP after excluding the above two Co. namely M/s Eclerx and M/s Mold Tek (Supra) and then determine the adjustment, if any after giving the benefit of tolerance range of +=5%. 18. Ground no.15 & 16 is regarding exclusion of communication expenses/lease line charges from export turnover for the purpose of computation of deduction u/s 10A of the Act. 19. We have heard the learned AR as w .....

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ra, wherein the Hon ble High Court while dealing with the issue has held in para-17 & 18 as under; 17. From the aforesaid judgments, what emerges is that, there should be uniformity in the ingredients of both the numerator and the denomination of the formula, since otherwise, it would produce anomalies or absurd results. Section 10A is a beneficial section. It is intended to provide incentives to promote exports. The incentive is to exempt profits relatable to exports. In the case of combine .....

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is to be derived from the total business of the undertaking. Even in the case of business of an undertaking, it may include export business and domestic business, in other words, export turnover and domestic turnover. The export turnover would be a component or part of a denominator, the other component being the domestic turnover. In other words, to the extent of export turnover, there would be a commonality between the numerator and the denominator of the formula. In view of the commonality, t .....

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section 10A, there is nothing in the said section to mandate that what is excluded from the numerator that is export turnover would nevertheless form part of the denominator. Though when a particular word is not defined y the Legislature and an ordinary meaning is to be attributed to the same, the said ordinary meaning to be attributed to such word is to be in conformity with the context in which it is used. When the statute prescribes a formula and in the said formula, export turnover is defin .....

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