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M/s. e4e Business Solutions India Private Limited Versus The Deputy Commissioner of Income Tax, Circle-11 (3) , Bangalore

2015 (8) TMI 607 - ITAT BANGALORE

Transfer pricing adjustment - Computation of the arm's length price - selection of comparables - Held that:- As far as comparables list at Sl. Nos. 17 and 25 of the list of comparables chosen by the Transfer Pricing Officer is concerned, viz., Infosys BPO Ltd. and Wipro Ltd., the turnover of these companies are admitted beyond ₹ 200 crores. It has been held by this Tribunal in several decisions like Trilogy E-Business Software India P. Ltd. v. Deputy CIT [2013 (1) TMI 672 - ITAT BANGALORE .....

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am International Services P. Ltd. v. Asst. CIT (2014 (10) TMI 393 - ITAT MUMBAI ) in para 13(iii) at page-14 of the order held that the promoters of these two companies were involved in fraud for earlier years and hence the financial results of these companies are distorted and cannot be relied upon and in this regard relied on several decisions rendered by the various Benches of the Income-tax Appellate Tribunal. Respectfully following the same, we direct the aforesaid two companies be excluded .....

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to turnover there is dispute in the case of Asit C. Mehta about the percentage of the employee cost to turnover. In respect of Asit C. Mehta the learned Departmental representative submitted that the data processing charges mentioned in Schedule 12 of the profit and loss account should also be considered as employee cost and the percentage worked out accordingly. In respect of Accentia technologies Ltd., also the issue should be remanded as the employee cost to turnover issue was not raised befo .....

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ployee cost to sales is less than 25 per cent. and therefore these two companies are directed to be excluded from the list of comparable companies. comparable company at Sl. Nos. 5, 14 and 16 of the chart of comparable companies chosen by the Transfer Pricing Officer viz., Appollo Health Street Ltd., M/s. HCL Comnet and M/s. Informed Technologies India Ltd., are concerned, it is not in dispute before us that the related party transaction in the case of companies exceeds 15 per cent. (17.77 pe .....

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ld-Tek Technologies Ltd. (Seg.) at Sl. Nos. 11 and 20 of the list of comparable companies chosen by the Transfer Pricing Officer, being chosen as comparable companies, the Income-tax Appellate Tribunal, Bangalore Bench in the case of Symphony Marketing Solutions India P. Ltd. v. ITO [2014 (2) TMI 83 - ITAT BANGALORE] these companies were held to be not comparable with companies in information technology enabled services sector

Bodhtree Consulting Ltd. (Seg). was into software developm .....

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mpany was rightly regarded as comparable.

Accurate Data Converters Ltd. - he request made by the assessee has to be accepted in view of the lack of opportunity provided by the Transfer Pricing Officer/Dispute Resolution Panel. Accordingly, the Transfer Pricing Officer/Assessing Officer is directed to furnish a copy of the annual report of this company to the assessee. The assessee will thereafter furnish his explanation as to whether this company can be considered as a comparable comp .....

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he assessee will thereafter furnish its reply as to why this company should not be considered as a comparable company. The Transfer Pricing Officer/ Assessing Officer will thereafter decide the question of considering this company as a comparable company after affording opportunity of being heard to the assessee.

Excluding telecommunication charges while computing deduction under section 10A - Held that:- king into consideration the decision rendered by the hon'ble High Court of Karna .....

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ri. Smt.Shreya Loyalka, CA For the Respondent : Shri C.H. Sundar Rao, CIT-I(DR) ORDER N. V. Vasudevan (Judicial Member).- This appeal by the assessee is against the order dated July 26, 2011 of the Deputy Commissioner of Income-tax, Circle-11(3), Bangalore passed under section 143(3) read with section 144C of the Income-tax Act, 1961. 2. iSeva Inc. incorporated in November 1999 in the United States of America is the holding company of ISPL. iSeva Inc. is part of the e4e group which includes Azte .....

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n and software engineering services for software development. 3. Financial results of ISPE for the financial year 2006-07 Description Amount (Rs.) Operating revenue 64,87,05,072 Operating expenses (*) 56,04,33,299 Operating profit 8,82,71,773 Operating profit to expenses 15.75% (*) excluding The associated enterprise, non-associated enterprise financial result of the company (as per the transfer pricing report) is as under : Particulars With AE With non-AE Total Operating income (*) 54,64,40,687 .....

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rt) The following are the international transactions entered into by the taxpayer with its associated enterprises (AEs) as per the 3CB report and as per the reference received from the Assessing Officer. (Rs.) Services relating to e-customer relationship management 54,64,40,687 Reimbursement of telecom usage expenses 33,21,866 6. In this appeal we are concerned only with the computation of the arm's length price of international transaction of rendering of services relating to e-customer rel .....

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lients, namely : (a) Financial services, and (b) Technical services. Service areas The services provided by iSeva Inc. and JSPL can be broadly classified into three categories : ● Live e-mail response ; ● Real-time collaborative chat ; and ● Voice response. Outbound support Outbound support services provided by ISPL are in the nature of tele marketing services. ISPL obtains a list of all prospective customers from the client (alternately iSeva Inc., could procure such a list fr .....

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ts' products, troubleshooting, filling out application form (sales support), etc. ISPL's telecom engineers set up a call routing process for all calls (or some set of calls based on certain pre-arranged rule) to be redirected to ISPL. Once the calls arrive in India, they will be handled by a dedicated set of agents who will answer the call and resolve the customer's queries. 8. Final set of comparable companies considered by the Transfer Pricing Officer and the operating profit to to .....

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inancial Services Ltd. (Seg.) 5.07 11 Eclerx Services Ltd. 89.33 12 Flextronics Software Systems Ltd. (Seg.) 8.62 13 Genesys International Corporation Ltd. 13.35 14 HCL Comnet Systems and Services Ltd. (Seg.) 44.99 15 ICRA Techno Analytics Ltd. (Seg.) 12.24 16 Informed Technologies India Ltd. 35.56 17 Infosys BPO Ltd. 28.78 18 IServices India Pvt. Ltd. 49.47 19 Maple E Solutions Ltd. 34.05 20 Mold-Tek Technologies Ltd. 113.49 21 R Systems International Ltd. (Seg.) 20.18 22 Spanco Ltd. (Seg.) (ea .....

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to this order to appreciate some of the contentions that were taken up before us. The Transfer Pricing Officer after giving negative adjustments towards working capital adjustment of 1.58% arrived at an arithmetic mean of 31.79 per cent. and determined the adjustment to the arm's length price as follows : "18.6 Computation of the arm's length price : The arithmetic mean of the profit level indicators is taken as the arm's length margin. (Please see annexure E For details of com .....

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ce received vis-a-vis the arm's length price : The price charged by the taxpayer to its associated enterprises is compared to the arm's length price as under : (Rs.) Arm s length price (ALP) at 131.79% of operating cost 73,85,95,044 Price charged in the international transactions 64,87,05,072 Shortfall being adjustment under section 92CA 8,98,89,972 The above shortfall of ₹ 8,98,89,972 is treated as transfer pricing adjustment under section 92CA" 9. Against the said adjustment .....

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the said order of the Assessing Officer, the assessee has preferred the present appeal before the Tribunal. 10. We have heard the submissions of learned counsel for the assessee and the learned Departmental representative. The assessee filed a chart showing how some of the comparable companies chosen by the Transfer Pricing Officer are not comparable in the light of the decisions rendered by various Benches of the Tribunal in the case of similar information technology enabled services companies .....

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Services Ltd., Informed Technologies India Ltd., Maple eSolutions Ltd. and Triton Corporation Ltd. as comparable to the appellant despite the same failing to meet the legally acceptable criteria for comparability. The honourable Dispute Resolution Panel has also erred in confirming the order of the Transfer Pricing Officer in this regard. These companies should be rejected as comparables, notwithstanding that Triton Corporation Ltd. was earlier selected by the appellant and notwithstanding that .....

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ion was raised before the Transfer Pricing Officer or before the Commissioner of Income-tax (Appeals) in appeal and therefore, the taxpayer should not be permitted to raise additional ground and ask for exclusion of the above enterprise in the determination of the average margins is not sustainable. In the first place, these are initial years of implementation of transfer pricing legislation in India and taxpayers as well as tax consultants were not fully conversant, with this new branch of law .....

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s not appear to be comparable. Even if the taxpayer or its counsel had taken Datamatics as comparable in its transfer pricing 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 .....

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ayer. When substantial justice and technical considerations are pitted against each other, the cause of substantial justice deserves to be preferred. For the other side cannot claim to have a vested right in injustice being done due to some mistakes on its part." 12. In the light of the decision of the hon'ble Special Bench in the case of Quark Systems P. Ltd. (supra)we are of the view that the additional ground sought to be raised by the assessee has to be admitted and it has to be exa .....

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arable company mentioned in the additional ground on different parameters than the one which was raised before the Dispute Resolution Panel. We therefore admit the additional ground of appeal for adjudication. 13. We have considered the rival submissions. As far as comparables list at Sl. Nos. 17 and 25 of the list of comparables chosen by the Transfer Pricing Officer is concerned, viz., Infosys BPO Ltd. and Wipro Ltd., the turnover of these companies are admitted beyond ₹ 200 crores. It h .....

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8377; 4.5 crores. Apart from the above these two companies command premium in the market due to their brand value and cannot be compared with a company like the assessee. It was so held by the Hyderabad Bench of the Income-tax Appellate Tribunal in the case of Stream International Services P. Ltd. v. Asst. CIT I. T. A. No. 8290/ Mum/2011 for the assessment year 2007-08 order dated October 10, 2014. In view of the aforesaid decisions rendered by the Tribunal, we are of the view that the aforesaid .....

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r years and hence the financial results of these companies are distorted and cannot be relied upon and in this regard relied on several decisions rendered by the various Benches of the Income-tax Appellate Tribunal. Respectfully following the same, we direct the aforesaid two companies be excluded from the list of comparable companies chosen by the Transfer Pricing Officer. 15. The assessee next seeks exclusion of the following four companies from the list of comparable companies by applying the .....

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3 in paragraph 35, this Tribunal has held that in information technology enabled services sector also the companies which has less than 25 per cent. of the sales as employee cost should not be selected for comparability analysis for determination of the arm's length price. 16. As far as the percentage of employees' cost to sales is concerned, the assessee has filed a chart showing the employee cost to sales in respect of the aforesaid four companies. The said chart is given as annexure-I .....

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nded as the employee cost to turnover issue was not raised before the Dispute Resolution Panel/Transfer Pricing Officer by the assessee and the figures given by the assessee before the Tribunal needs verification. We are of the view that the plea put forth by the learned Departmental representative is acceptable and in respect of these two companies the employee cost to sales should be examined afresh by the Assessing Officer/Transfer Pricing Officer after due opportunity to the assessee. In res .....

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party transaction in the case of companies exceeds 15 per cent. (17.77 per cent. in the case of Appollo Health Street Ltd., 21.52 per cent. in the case of HCL Comnet and 15.93 per cent. in the case of Informed Technologies India Ltd.) and in view of the decision of the Tribunal in the case of 24/7 Customer.Com.Pvt. Ltd. v. Deputy CIT in I. T. A. No. 227/Bang/2010, followed by this Tribunal in the case of Logica Private Ltd. (supra) wherein it was held that where the related party transaction ex .....

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arty transaction shown by the Transfer Pricing Officer is 13.70 per cent. The assessee has filed a chart before us showing related party transaction at 15.44 per cent. The same is given as annexure-III to this order. We therefore remand for fresh consideration by the Transfer Pricing Officer the related party transaction in the case of this company after affording an opportunity of being heard to the assessee. In the event of related party transaction being more than 15 per cent., the said compa .....

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nies were held to be not comparable with companies in information technology enabled services sector. The following were the relevant observations of the Tribunal : "5. Eclerx Services Ltd. 20. This company is listed at Sl. No. 11 in the list of comparable companies chosen by the Transfer Pricing Officer. It is the stand of the assessee that this company offers solutions that include data analytics, operations management, audits and reconciliation and therefore has to be classified as high- .....

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eputy CIT (International Taxation) (supra) had an occasion to deal with comparability of this company in the case of an information technology enabled services company such as the assessee and the Tribunal held as follows : '14. The assessee has objected for this company being taken as comparable mainly on the ground that it was having a supernormal profit of 89 per cent., and as such it cannot be taken as a comparable in view of the decision of the Mumbai Bench of the Tribunal in the case T .....

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t is engaged in providing knowledge process outsourcing services, which is distinct from the nature of services provided by the assessee.' 21. We are of the view that in the light of the decision of the Hyderabad Bench referred to above, this company cannot be regarded as a comparable for the reason that it was functionally different . (8) Moldtek Technologies Ltd. 25. This company is listed at Sl. No.16 of the list of comparable companies chosen by the Transfer Pricing Officer. As far as th .....

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the said segment effective from April 1, 2007 and transferred the business unit to the Company Plastics Ltd. The extract from the annual report confirms the fact that the company had restructured its operations resulting in demerging the plastic segment business. Information technology (IT) division : The information technology division (also referred to as the knowledge process outsourcing division by the company) of the company specialises in providing structural design and detailing services .....

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ing the knowledge process outsourcing division of the company : "The company has achieved about 56.49 per cent. growth in 2007-08 to register a turnover of ₹ 17.86 crores. The company having established its credentials in structural engineering services to US clients is devising aggressive marketing strategy to achieve rapid growth." This company is also engaged in providing a host of engineering services like civil and structural engineering services, mechanical product design, .....

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rom the list of comparables.'" 19. As can be seen from the aforesaid decision, the two companies viz., (1) Eclerx Services Ltd. ; (2) Mold-Tek Technologies Ltd. (Seg.) were considered as not comparable because of the distinction that lies between a knowledge process outsourcing (KPO) company and business process outsourcing (BPO) company. The Special Bench of the Income-tax Appellate Tribunal, Mumbai Bench in the case of Maersk Global Centres (India) P. Ltd. v. Asst. CIT in I. T. A. No. .....

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ared service centre, transaction processing, data entry reconciliation of statements, audit of shipping documents and other similar support services and concluded at para 83 of its order that the aforesaid two companies are not comparables. As to whether the nature of services rendered by the assessee in the present case is similar to the one rendered by M/s. Maersk Global Centres (India) Pvt. Ltd., is an aspect which in our view will have to be looked into by the Transfer Pricing Officer/Assess .....

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ble was that this company is not in information technology enabled services, this company had made extraordinary profits, this company fails 75 per cent. information technology enabled services revenue filter, segmental results were obtained by the Transfer Pricing Officer by issue of notice under section 133(6) of the Act which were not available in public domain. 21. The Transfer Pricing Officer however held that segmental profit of data cleansing activity alone was taken for comparison and da .....

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regarded as extraordinary profit. Regarding the plea of the assessee that this company fails 75 per cent. information technology enabled services revenue filter, the Transfer Pricing Officer held that when the segmental revenue of data cleansing alone was considered for comparison, the application of 75 per cent. revenue from information technology enabled services was an irrelevant filter and the filter need not be applied at the entity level. 22. Before the Dispute Resolution Panel the assess .....

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ision of the Income-tax Appellate Tribunal, Mumbai Bench in the case of Willis Processing Services (I.) P. Ltd. v. Deputy CIT [2014] 30 ITR (Trib) 39 (Mum) wherein the Tribunal in para 30 of its order held that this company was into information technology enabled services. 25. We have considered the rival submissions. From the facts as narrated in the order of the Transfer Pricing Officer it is clear that Bodhtree Consulting Ltd., had four distinct sources of revenue viz., (i) software developme .....

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Transfer Pricing Officer however has demonstrated that the margin of data cleansing business alone was being considered for comparability and hence the plea of the assessee was not sustainable. The decisions referred to by learned counsel for the assessee are concerned, the facts as brought out by the Transfer Pricing Officer in his order are not discussed. In the case of NXP Semi Conductors India P. Ltd. v. Deputy CIT I. T. A. No. 1560/Bang/2012 [2015] 41 ITR (Trib) 23 (Bang) in its order the T .....

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r Pricing Officer were also different. On the facts as it transpired before the Transfer Pricing Officer and the arguments of the assessee before the Transfer Pricing Officer/Dispute Resolution Panel, we are of the view that this company was rightly regarded as comparable. 26. The next objection of the assessee is with regard to the Transfer Pricing Officer's action in considering Accurate Data Converters Ltd., which is at Sl. No. 25 of the list of comparables chosen by the Transfer Pricing .....

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ore considered this company as in the business of information technology enabled services. Thereafter he has analysed the financial results and export revenues of this company and has considered this company as a comparable. The company had furnished its annual report to the Transfer Pricing Officer and it is stated so by the Transfer Pricing Officer in his order. In its objection before the Dispute Resolution Panel, the assessee specifically pointed out that the Transfer Pricing Officer did not .....

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companies as comparables. 28. Before us the limited prayer of learned counsel for the assessee was that the assessee should be given a copy of the annual report of this company and afforded an opportunity of explaining as to how this company is not comparable. We are of the view that the request made by the assessee has to be accepted in view of the lack of opportunity provided by the Transfer Pricing Officer/Dispute Resolution Panel. Accordingly, the Transfer Pricing Officer/Assessing Officer .....

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This company is listed at Sl. No. 18 of the list of comparables chosen by the Transfer Pricing Officer. For choosing this company as a comparable, the Transfer Pricing Officer has made the following observations : "33.18 IServices India P. Ltd. (operating profit/total cost for the financial year 2006-07-49.47 per cent.) The company was not part of the companies considered by the taxpayer in the accept/reject matrix given as Appendix-D to the transfer pricing report. However, the data of the .....

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ide this office letter dated May 17, 2010. In response, the taxpayer in its letter dated June 28, 2010 did not offer any comments. Thus the company is considered as a comparable. However, there is a mistake in the computation of profit level indicator of the company. The same is rectified as under : Description Amount (Rs.) Operating revenues 16,29,20,061 Expenses debited to profit and loss account 11,11,80,761 Less : Interest 14,80,537 Less : Exchange difference 6,42,614 Less : Miscellaneous ex .....

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er did not furnish the information obtained from this company in exercise of his powers under section 133(6) of the Act. It was further pointed out that even as per the Transfer Pricing Officer, the annual report of this company for the financial year 2006-07 was not available. The Transfer Pricing Officer has gone by the data available on Capitaline data base. Learned counsel for the assessee therefore made a prayer that the question of considering the aforesaid company as a comparable should b .....

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port of the company for the financial year 2006-07 and also furnish the assessee copies of the same together with the information obtained by the Transfer Pricing Officer pursuant to issue of notice under section 133(6) of the Act. The assessee will thereafter furnish its reply as to why this company should not be considered as a comparable company. The Transfer Pricing Officer/ Assessing Officer will thereafter decide the question of considering this company as a comparable company after afford .....

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