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2015 (10) TMI 483 - ITAT BANGALORE

2015 (10) TMI 483 - ITAT BANGALORE - TMI - Transfer pricing adjustment - selection of comparable - Held that:- Accentia Technologies Ltd. (Seg.) - as during the previous year there were extra ordinary events that took place in this company which warrants exclusion of this company as a comparable. We therefore hold that this company cannot be considered as a comparable.

Acropetal Technologies Ltd. (Seg.) - On a perusal of the Note No.15 of notes to accounts which gives segmental revenu .....

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Assessee are routine low end ITES functions. We therefore hold that this company could not have been selected as a comparable, especially when it performs engineering design services which only a Knowledge Process Outsourcing [KPO] would do and not a Business Process Outsourcing [BPO].

Coral Hubs Ltd. cannot be considered as a comparable - It may also be relevant to point out that the TPO in his order has observed that this company is retained as a comparable on the basis of detailed .....

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information systems. These activities are totally different from the activities of the assessee which perform very limited/low end functions back office services. The business of Cross Domain ranges from high end KPO services, development of product suites and routine low end ITES service. However, there is no bifurcation available for such verticals of services. Therefore the assessee contends that Cross Domain cannot be compared to a routine ITES service provider. We are of the view that in t .....

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ng expenses. Page 133 of the annual report of this company for the F.Y. 2007-08 shows that this company realizing its brand value has chosen to value the same on the basis of its earnings and that of Infosys. The brand value of the Assessee and Infosys has been valued at ₹ 31,863 Crores. Infosys BPO, being a subsidiary of Infosys, has an element of brand value associated with it. This is also clear from the presence of brand related expenses incurred by this company. Presence of a brand co .....

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comparable, this company is also directed to be excluded from the list of comparables.

Hon’ble High Court of Karnataka in the case of CIT v. Tata EIxsi Ltd [2011 (8) TMI 782 - KARNATAKA HIGH COURT ] has held that while computing deduction under section 10A of Act, expenditure incurred by the assessee, if excluded from the export turnover, should also be excluded from the total turnover. In view of the aforesaid decision of the Hon’ble High Court of Karnataka, the AO is directed to re .....

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TATA ELXSI (supra) of the Hon’ble Karnataka High Court. We held that the said loss should be excluded both from ETO and TTO. We hold and direct accordingly. - Decided in favour of assessee - IT(TP)A No.1678/Bang/2012 - Dated:- 4-9-2015 - SHRI N.V VASUDEVAN, JUDICIAL MEMBER AND SHRI S RIFAUR RAHMAN, ACCOUNTANT MEMBER For The Appellant : Shri Ajit Kumar Jain, CA For The Respondent : Smt. Neera Malhotra, CIT ORDER PER SHRI S RIFAUR RAHMAN, ACCOUNTANT MEMBER : This appeal by the assessee is against .....

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resent case and in any case in violation of the principle of equity and natural justice. 2. The Hon ble DRP and the learned AO have erred in law and on facts in confirming the action of the Transfer Pricing Officer (TPO) in making an adjustment amounting to ₹ 91,14,06,057 to the price charged in relation to the international transactions carried out by the appellant and upholding the Arm s Length Price (ALP) margin of 25.90 percent as determined by the TOP as against the ALP of 13.31 perce .....

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year [i.e, the Financial Year (FY) 2007-08] of the comparable companies despite the fact that the same was not available to the appellant at the time of preparing the TP documentation. 5. The Hon ble DRP and the learned AO have erred in upholding the action of the TPO in rejecting certain comparable companies identified by the appellant in its TP study using unreasonable comparability criteria and contrary to facts as evidenced by the audited financial statements of the said companies. 6. The Ho .....

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Hon ble DRP and the learned AO have erred in upholding the action of the TPO in using the information obtained u/s 133(6) of the Income-tax Act, 1961 (Act) despite such information being inconsistent with the information available in public domain, including the audited financial statements, of the comparable companies. 8. The Hon ble DRP and the learned AO have erred in upholding the action of the TPO in computing the operating margins of the comparable companies and the appellant with certain .....

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, as allowed under the Act and the Income-tax Rules, 1962 (Rules). 11. The learned AO and the Hon ble DRP have erred in law and on facts n re-computing the relief u/s 10A of the Act at ₹ 46,96,88,074/- as against the amount of ₹ 50,10,42,467/- claimed by the appellant in its return of income. 12. The Hon ble DRP has erred in law and on facts in upholding the action of the AO in holding that the foreing currency expenditure was incurred by the appellant for rendering technical service .....

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mputing the relief claimed u/s 10A of the Act. 14. Without prejudice to the above grounds, the Hon ble DRP and learned AO have erred in law and on facts in holding that the communication expenses amounting to INR 10,27,77,400/- insurance expenses amounting to INR 6,18,880 and the foreign currency expenses amounting to INR 19,45,91,781 should not be reduced from total turnover for the purpose of computation of relief u/s 10A of the Act even if these are reduced from export turnover. 15. The Hon b .....

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he assessee had filed additional ground as above. In the computation of relief u/s 10A of the Act, the assessee had reduced the quantum of foreign exchange losses from the export turnover and the total turnover. However, the AO has held that the same is to be reduced only from the export turnover and has proceeded to add the same to the total turnover.The jurisdictional Karnataka HC in the case of Tata Elxsi Ltd. (349 ITR 98), also followed by several rulings of this Hon ble Tribunal, have uphel .....

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In the alternative, the learned AO should have also added the same to the quantum of export turnover. Therefore, according to the assessee, the exchange losses should not have been added back to the total turnover. The assessee has prayed for admission of addl. Grounds. 5. We have considered the submission of the learned counsel for the assessee for admission of the additional ground and are of the view that the additional ground should be admitted for adjudication. The facts necessary for adjud .....

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erations Pvt. Ltd. .ie., the assessee, (Global eBiz or Global-e) is part of the Hewlett-Packard group (HP Group). Its ultimate Holding Company is Hewlett - Packard Company, USA. Global-e Business Operations Pvt. Ltd., is wholly owned subsidiary of HP Global Investments BV, Netherlands (HP Investments). Global-e undertakes HP s worldwide accounting and transaction processing work as part of HP s worldwide strategy of consolidating backroom operations. It manages operations that cover functionalit .....

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the FY 2006-07, Globale Business Operations Pvt. Ltd. provided data processing and other IT enabled services to its AEs located in various parts of the world. 8. The taxpayer is registered under the Software Technology Parks of India Scheme and has been claiming tax holiday benefit in respect of the profits earned by it from the research and development. 9. Financial Results of Global-e Business for the FY 2007-08 Description Amount (Rs.) Operating Revenues 6153468919/- Operating Expenses (*) 5 .....

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of the taxpayer s case and this was not disputed by the Transfer Pricing Officer (TPO) to whom the question of determination of ALP was referred to by the AO. 11. The assessee had identified 19 comparables in the TP study out of which TPO accepted 7 comparables as listed below: Sl No. Name of the comparable company Operating Margin to Cost (FY 2007-08) 1 Caliber Point Business Solutions Ltd 10.97 2 Cosmic Global Ltd 23.30 3 Spanco Ltd (Seg.) (Earlier known as Spanco Telesystems & Solutions .....

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Asit C Mehta Financial Services Ltd (Seg.) 9.42 5 Caliber Point Business Solutions Ltd. 10.97 6 Coral Hubs Ltd (Earlier Known as Vishal Information Technologies Ltd 50.68 7 Cosmic Global Ltd 23.30 8 Crossdomain Solutions Ltd 27.03 9 Datamatic Financial Services Ltd (Seg.) 29.11 10 e4e Healthcare Solutions (Formerly known as Nittany Outsourcing Services Pvt. Ltd) 18.54 11 Eclerx Services Ltd. 58.80 12 Genesys International Corporation Ltd. 47.40 13 Infosys BPO Ltd 19.66 14 IServices India Pvt. L .....

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ngth price of the software services rendered by the taxpayer to its AE(s) wss computed as under: Arithmetic mean PLI : 24.75% Less: Working capital adjustment (Annexure-G) : -1.15% Adj. Arithmetic mean PLI : 25.9% Arm s Length Price: Operating Cost Rs. ₹ 5611497201/-* Arms Arms Length Margin 25.9% of the Operating cost Arms Length Price (ALP) @125.9% Rs.7064874976/- *excluding Exchange loss, financial expenses Price Received vis-à-vis the Arms Length Price: The price charged by the .....

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e heard the submissions of both the parties. The ld. counsel for the assessee filed before us submissions on each of the companies that were considered as comparable by the TPO and has also explained as to why those companies cannot be considered as comparable. The ld. DR, on the other hand, relied on the order of the TPO and the directions of the DRP, wherein the DRP has given reasons as to why the objections of the assessee to adopt comparable proposed by the TPO should not accepted. We will d .....

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8 wherein the fact that this company had acquired Thunga Software Pvt. Ltd., GSR Physicians Billing Services Inc., GSR Systems Inc. and Denmed Inc. is mentioned. Our attention was also drawn to the decision of the Hyderabad ITAT Bench in the case of Capital IQ Information Systems India Pvt. Ltd. v. DCIT [ 2013] 32 Taxman.com 21 (Hyd. Trib). In the aforesaid decision, the Hyderabad Bench of the Tribunal had to deal with a case of determination of ALP in the case of an assessee who was providing I .....

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rising out of amalgamation in the company. In this regard, the assessee has relied upon the order of the DRP for the assessment year 2008-09 in assessee's own case. It is seen that the DRP while considering similar objection placed by the assessee in the case of another company, viz. Mold Tek Technologies Ltd., in the proceedings relating to the assessment year 2008-09, has observed in the following manner- "17.5. In addition to the above, the Director's Report of the company for th .....

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roval of the shareholders. The shareholders of the company gave approval for the merger and the de-merger on 25.01.2008 and the Hon'ble High Court of Andhra Pradesh had approved the merger and de-merger on 25th July, 2008. Subsequently, the accounts of Moldtek Technologies for FY 2007-08 were revised. On a perusal of the annual report it is noticed that Teckmen Tools Pvt. Ltd. and the Plastic Division of the company were demerged and the resulting company was named as Moldtek Plastics Ltd. T .....

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there were merger and demerger in the financial year and it was an exceptional year of performance as financial statements were revised by this company much after the closure of the previous year. The Panel agrees with the contention of the assessee that it is an exceptional year having significant impact on the profitability arising out of merger and demerger." 11. On careful consideration of the matter, we also agree with the aforesaid view of the DRP that extra-ordinary event like merger .....

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f the ld. counsel for the assessee and are of the view that the ratio laid down by the Hyderabad Bench of the ITAT is squarely applicable to the present case also. It is clear that during the previous year there were extra ordinary events that took place in this company which warrants exclusion of this company as a comparable. We therefore hold that this company cannot be considered as a comparable. (2) Acropetal Technologies Ltd. (Seg.) 18. This company is listed at Sl.No.2 of the comparables c .....

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ecasting tools. The data management services provided by the assessee include routine business data reporting and management, website management, marketing data analysis and top line reporting. As far as Acropetal Technologies Ltd. is concerned, this company does the business of export of software services. It is also seen from the segmental revenue of this company (Note 15 to the notes on accounts to Annual Report for 07-08) that it derives income from engineering design services and software d .....

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gives segmental revenue of this company, it is clear that the major source of income for this company is from providing Engineering Design Service and Information Technology Services. The functions performed by the Engineering Design Services segment of the company cannot be considered as comparable to the ITES/BPO functions performed by the Assessee. The performance of Engineering Design Services is regarded as providing high end services among the BPO which requires high skill whereas the serv .....

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known as Vishal Information Technologies Ltd. The comparability of this company in the case of an ITES company by name 24 x 7 Customer.com Pvt. Ltd. was considered by the Tribunal in ITA No.227/Bang/2010 and by order dated 09.11.2012 the Tribunal held that this company is not functionally comparable with ITES for the following reason:- 17.3 Vishal Information Technologies Ltd. (VIT) - In the case of this comparable, we find that the Mumbai Tribunal in the case of Mearsk Global Services (I) Pvt L .....

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se on the issue of excluding VITL as a comparable squarely applies. This decision was followed by the decision of the co-ordinate bench of this Tribunal in the case of Netlinx India(P) Ltd in ITA No.454/Bang/2011 dt.19.10.2012 wherein it was held that Vishal Information Technologies Ltd cannot be considered as a comparable. We, therefore, respectfully following the decision of the Mumbai Tribunal in the case of Mearsk Global Services (I) Pvt Ltd, direct the Assessing Officer / TPO to exclude Vis .....

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ing passed by the TPO. It is also seen that this company entered into an area of business known as New Vertical Digital Library & Print on Demand in F.Y. 2007-08. In the case of Capital IQ Information Systems India Pvt. Ltd. (supra), the ITAT Hyderabad Bench in the case of ITES company considered the comparable of this company as an ITES company and held as follows:- IV. Coral Hub Limited (Earlier known as Vishal Information Technologies Ltd.): 16. The assessee has objected for this company .....

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performed by the assessee. Since this company is acting as agent only by outsourcing its works to the third party vendors. In this context, the assessee relied upon the order of the DRP in assessee's own case for the assessment year 2008-09, wherein the DRP, after taking into consideration, the aforesaid aspect, has accepted the claim of the assessee. The assessee further submitted that the Income-tax Appellate Tribunal Mumbai Bench in the case of Asstt. CIT v. Maersk Global Service Centre .....

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or the last three years, and the fact that it has also commenced a new line of business of Printing on Demand(POD), wherein it prints upon clients request, concluded as follows- "18.4. In view of this major difference in functionality and the business model, this Panel is of the view that 'Coral Hub' is not a suitable comparable to the taxpayer and hence needs to be dropped form the final list of comparables." In case of Maersk Global service Centre India (P.) Ltd. (supra), the .....

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ions made by the DRP as well as the decision of the ITAT Mumbai in the case of Maersk Global Service Centre, (supra), we accept that this company cannot be taken as a comparable. 22. It is also further noticed that the employee cost/operating sales of this company is a mere 3%, whereas the threshold limit for acceptance as a comparable on the basis of employee cost to sales should be at least 25%. This Tribunal in the case of First Advantage Offshore Services Ltd. v. CIT, IT(TP)A No.1086/Bang/20 .....

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able. Though it is without any dispute that the software development would require skilled employees and, therefore, the employee cost would definitely be more than 25% of the total expenses, it cannot be said that the said filter is not applicable to ITES segment, where comparably less skilled employees are employed. In the ITES segment, the entire work is to be done by the employees and, therefore, even though they may be less skilled compared to software development segment, the number of emp .....

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ompany was considered as a comparable and listed at Sl.No.8 of the comparables chosen by the TPO. It is the stand of the assessee that this company is not functionally comparable. As observed in the case of Coral Hubs Ltd., the TPO rejected the plea of the assessee on the basis of a non-existent TP order passed for the A.Y. 2007-08. It is seen that the business profile of this company is re-engineered payroll service. This company is also engaged in the development of information systems. These .....

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end to end payroll, retrials, reimbursement, tax proof verifications upto issue of Form 16 for employees of our clients across different industry verticals. Our processes are highly scalable and provide end to end payroll solutions to clients with headcount ranging from 5 to 65,000. Crossdomain s IT knowledge and domain competence has provided the edge to develop information systems to implement process innovation and continuously increase efficiency and turn-around-time for business critical p .....

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garding this company as a comparable, this company should be excluded from the list of comparables, accepting the plea of the Assessee. We hold accordingly. (5) Eclerx Services Ltd. 26. This company is listed at Sl.No.11 in the list of comparable companies chosen by the TPO. 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 end KPO. In support of the stand of .....

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any in the case of an ITES 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%, 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 M/s. Teva India Ltd. (supra). That apart, relying upon the annual report of the company, the learned Authorised Representative for the assessee has .....

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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. (7) Infosys BPO Ltd 28. This company is listed at Sl.13 in the list of comparable companies chosen by the TPO. As far as this company is concerned, it is the submission of the ld. counsel for the assessee that this company has a brand value and therefore there would be significant influence in the pricing policy which will impact the margins. .....

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d value associated with it. This is also clear from the presence of brand related expenses incurred by this company. Presence of a brand commands premium price and the customers would be willing to pay, for the services/products of the company. (8) Mold-tek Technologies Ltd. 29. This company is listed at Sl.No.16 of the list of comparable companies chosen by the TPO. As far as this company is concerned, the submission of the assessee before us is that it is in the business of Knowledge Process O .....

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eport confirms the fact that the Company had restructured its operations resulting in demerging the plastic segment business. Information Technology (IT) division: The IT division (also referred to as the KPO division by the company) of the company specializes in providing structural design and detailing services which can be categorized as structural engineering services. The structural engineering services provided by the IT division of the company cannot be classified as falling with the scop .....

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sing aggressive marketing strategy to achieve rapid growth. (8) Wipro Ltd. 30. This company is listed at Sl.No.19 in the list of comparable companies chosen by the TPO. As far as this company is concerned, the discussion made while deciding Infosys BPO Ltd. as a comparable will equally apply to this company also. This company owns substantial intellectual property on software products. This company cannot therefore be regarded as a comparable. For the reasons given while disregarding Infosys BPO .....

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inancial Services Ltd (Seg) 29.11 6 e4e Healthcare Solutions Ltd (formerly Known as Nittany Outsourcing Services Pvt Ltd) 18.54 6 Genesys International Corporation 47.40 7 IServices India Pvt Ltd 10.77 8 Jindal Intellicom Pvt Ltd -10.29 9 R Systems Internatinal Ltd (seg) 4.30 10 Spanco Ltd (seg) (formerly known as Spanco Telesystems & Solutions Ltd 8.81 11 Allsec Technologies Ltd. -13.29 Arithmetic mean 11.25 32. It can be seen that arithmetic mean of profit margin to cost of remaining compa .....

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