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2015 (11) TMI 273 - ITAT DELHI

2015 (11) TMI 273 - ITAT DELHI - TMI - Transfer pricing adjustment - Held that:- Vishal Information Technologies Ltd. is not a valid comparable as held in Google India Pvt. Ltd. vs. DCIT, Bangalore (2013 (3) TMI 172 - ITAT BANGALORE) wherein Google India was engaged in the business of software development services and ITES. We are of the opinion that Coral Hub (previously known as Vishal) cannot be used as a comparable and so we direct the AO to exclude this company from the list of comparables. .....

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the Hon’ble High Court held that this company is engaged in KPO services and so, this company cannot be compared with the low end service provider like the assessee in this case. We order the exclusion of this company from the set of comparables.

INFOSYS BPO - extra ordinary event of amalgamation during the year has helped Infosys BPO in acquiring domains skill sets in the finance, administration space as well as enhanced its global presence with centers at Thailand and Poland. In vie .....

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omparables. The assessee fails.

GENESYS INTERNATIONAL is into mapping business and it provides geographical information services comprising Photogrammetry, Remote Sensing, Cartography, Data Conversion, related Computer based Services and Information Technology enabled and other related services, which cannot be by any stretch of imagination be said to be comparable to that of the assessee. Since Genesys International Corporation Ltd. is functionally dis-similar with that of the assess .....

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udevan, CA For The Revenue : Ms. Y. Kakkar, Senior DR ORDER PER A.T. VARKEY, JUDICIAL MEMBER : This appeal, at the instance of the assessee, is directed against the Order dated 18.10.2012 under section 143 (3) read with section 144C (5) of the Income-tax Act, 1961 (hereinafter referred to the Act ) in pursuance to the direction of the Dispute Resolution Panel (DRP) - I, New Delhi for the assessment year 2008-09. 2. The assessee filed e-return of income on 29.09.2009 declaring an income of ₹ .....

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nit for export of computer software/IT Enabled Services (ITES). This assessment year is the first year of commencing its operation. During the year, receipts from the exports of ₹ 16,87,42,181/- and other income of ₹ 3,64,378/- has been shown. 4. During the year under consideration, the assessee had entered into international transaction (as mentioned in the 92CE report) as under :- S.No. Description of the transactions Amount (in Rupees) 1 Provision of IT Enabled Services 16,87,42,1 .....

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as Profit Level Indicator (PLI) in the TNMM analysis. For comparing assessee s net profit, the assessee had identified 13 comparable companies and three years average PLI of these seven (7) companies was computed as 14.62% (page 3 of the TPO). The TPO vide order dated 27.10.2011 rejected the transfer pricing study of the assessee and took the following comparables to arrive at the PLI for computation of ALP :- Sl.No. Company PBIT/Cost (%) 1. Accentia 44.5 2. Aditya Birla Minacs -0.55 3. Asit C M .....

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pro BPO 30.23 20. R System International Ltd. (seg.) 4.3 AVG 29.16 Thereafter, the TPO computed the ALP as under :- Arithmetic mean PLI : 29.16% Less : Working Capital Adjustment : 3.89% Arm s Length Price : 25.27% Operating Cost Rs.146,383,404 Arms Length Margin 25.27% of the Operating cost Arms Length Price (ALP) Rs.183,374,490 b. Price received vis-à-vis the Arms Length Price : The price charged by the tax payer to its Associated Enterprises is compared to the Arms Length Price as unde .....

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, resulting in an adjustment to the extent of ₹ 14,632,310. Thereafter, the DRP vide order dated 03.09.2012 directed the TPO to recompute the transfer pricing adjustment after reexamining the ALP and excluded Moldtek from the list of comparables. As per the said direction, the revised final list of comparables is as under :- Sl.No. Name of Company NCP (%) 1. Caliber Point Business Solutions Limited 6.46 2. Cosmic Global Limited 23.24 3. R System International Ltd. 2.37 4. Spanco Telesystem .....

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ologies Limited 27.85 19. Wipro BPO 35.39 Average 21.88 Accordingly, the TPO has given the effect to the directions issued by the DRP and determined the ALP at ₹ 96,69,913/- instead of ₹ 1,46,32,310/-. 6. As a result of the final assessment completed vide order dated 18.10.2012 passed u/s 143(3) r.w.s. 144C of the Act assessing the total income of the assessee at ₹ 96,69,913/- which is as under :- Particulars Details Assessee s cost base Rs.14.6 crores Assessee s revenue Rs.16. .....

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the said company was included by the assessee in its list of comparables to calculate the ALP. The assessee though had included the said company in its list of comparables has every right to object to its inclusion before the TPO because there is no estoppel against law. So the contention of the ld. DR against the assessee turning around to object to the said company being included in the list of comparables is rejected. 9. The objection of the assessee that this company is functionally dissimil .....

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sidered as a comparable as the TPO as well as the taxpayer did not go into horizontals or functional lines within the ITES industry. Referring to a letter from the Coral Hub, the TPO repelled the contention of the assessee in respect to high outsourcing of the services by the said company as under :- That data conversion services (ITES) rendered by the taxpayer involved 9 - 10 steps. Of this process, stages 1 to 5 are performed by manpower vendors personnel in the office premises of the company .....

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bled services using its own assets and human resources (may not be on the roll of the company), and is functionally similar to the taxpayer. 10. Ld. AR submitted that the said comparable company has an expenditure head of data entry charges and vendor payments amounting to ₹ 21.68 crores which is 84.52% of the total expenditure. He submitted that in other words, it is engaged in trading of services on it s own. He submitted that the employee costs of comparable company is merely 4.40% of t .....

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logies Ltd. is not a valid comparable as held in Google India Pvt. Ltd. vs. DCIT, Bangalore (ITA No.1368/Bang./2010 for AY 2006-07) wherein Google India was engaged in the business of software development services and ITES. The objection in regard to exclusion of the said company from the list of comparables was accepted by the Tribunal and held as under :- 15. As regards the issue of (8) Vishal Information Technologies Ltd., we find that, it is adopted by the TPO. The DRP held that Vishal Infor .....

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ITES service provider rendering the services entirely on its own. In such circumstances, the net margins of the two comparables cannot be on the same basis. The decisions relied upon by the learned counsel for the assessee also held that the employee cost filter is important filter to be adopted for the purpose of computing ALP. In the case of Maersk Global Services Centre (India) Pvt. Ltd., in ITA No.3774/M/2011, the Tribunal at Mumbai has held that Vishal Information Technologies Ltd. has to .....

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ies cannot be on the same basis. We rely on the Hon ble jurisdictional High Court decision in the case of Rampgreen Solutions Pvt. Ltd. vs. CIT (ITA 102/2015 order dated 10.08.2015) wherein the Hon ble High Court held as under :- 38. In our view, even Vishal could not be considered as a comparable, as admittedly, its business model was completely different. Admittedly, Vishal s expenditure on employment cost during the relevant period was a small fraction of the proportionate cost incurred by th .....

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e outsourced. There was no material for the Tribunal to conclude that the outsourcing of services by Vishal would have no bearing on the profitability of the said entity. 13. In the light of the above, we are of the opinion that Coral Hub (previously known as Vishal) cannot be used as a comparable and so we direct the AO to exclude this company from the list of comparables. (ii) ECLERX SERVICES LIMITED 14. Ld. AR submitted that Eclerx is a provider of Knowledge Process Outsourcing (KPO) services .....

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20.39% of total cost of the company. 15. Ld. DR relied on the order of the TPO. 16. We have heard both the sides and perused the material available on record. The Hon ble jurisdictional High Court in the case of Rampgreen Solutions Pvt. Ltd. (supra) has held as under :- 36. As pointed out earlier, the transfer pricing analysis must serve the broad object of benchmarking an international transaction for determining an ALP. The methodology necessitates that the comparables must be similar in mater .....

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, both are into KPO Services. In Maersk Global Centers (India) Pvt. Ltd. (supra), the Special Bench of the Tribunal had noted that eClerx is engaged in data analytics, data processing services, pricing analytics, bundling optimization, content operation, sales and marketing support, product data management, revenue management. In addition, eClerx also offered financial services such as real-time capital markets, middle and back-office support, portfolio risk management services and various criti .....

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y different in its content and value. In Maersk Global Centers (India) Pvt. Ltd. (supra), the Special Bench of the Tribunal had noted the same and had, thus, excluded eClerx as a comparable. It is further observed that the comparability of eClerx had also been examined by the Hyderabad Bench of the Tribunal in M/s Capital Iq Information Systems(India) (P.) Ltd. v. Additional Commissioner of Incometax (supra), wherein, the Tribunal directed the exclusion of eClerx as a comparable for the reason t .....

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pricing analytics, bundling optimization, content operation, sales and marketing support, product data management, revenue management and in addition, eClerx also offered financial services such as realtime capital markets, middle and back-office support, portfolio risk management services and various critical data management services and the Hon ble High Court held that this company is engaged in KPO services and so, this company cannot be compared with the low end service provider like the as .....

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es. He submitted that the said comparable company has a turnover of more than 49 times to that of the assessee company and in this regard, he referred to page 20 of the Annual Report of Infosys BPO. He further submitted that during the year, Infosys BPO concluded a sale and purchase agreement with Koninklijike Philips Electronics N.V. (Philips) by means of which it made a 100% investment in the share capital amounting to ₹ 107 crores in P-Financial Services Holding B.V., the Netherlands en .....

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ssessee), cannot be countenanced in view of the Hon ble jurisdictional High Court s decision in the case of ChrysCapital Investment Advisors (India) Pvt. Ltd in ITA 417/2014 judgment dated 27.04.2015. Though we have held in the case of Avaya India (P) Ltd. vs. Addl.CIT, Range 2, New Delhi in ITA No.5528/Del./2011 order dated 18.09.2015 for AY 2007-08 that the Infosys BPO is a comparable company to Avaya, since it is rendering ITES services, however, we take note that an extra-ordinary event has .....

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purchase consideration. The shared service centres at Poland and India have become 100% subsidiary of the company on October 1, 2007 where as the shared service centre at Thailand has become a wholly owned subsidiary on December 3, 2007, the date on which all necessary conditions in the agreement were fulfilled. We take note that the aforesaid extra ordinary event of amalgamation during the year has helped Infosys BPO in acquiring domains skill sets in the finance, administration space as well .....

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on on standalone basis and the same was provided by the Wipro. Therefore, he considered this company as a comparable. 21. Before us the learned counsel, vide written submissions, submitted as under :- (i) Annual Report not available in public database : The annual report of Wipro BPO was not available in public database for FY 2007-08. We have relied upon the segment wise financial statements on standalone basis of Wipro Limited. Directors Report and Notes to the Accounts are available in the pu .....

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is not comparable on the basis of high turnover; (v) Substantial sales and marketing expenses and brand premium : Wipro BPO is a market leader in its industry which incurred substantial quantum as selling and marketing expenses. Due to this fact, customers pay a premium on their services, therefore, should be excluded. 22. The Ld. DR, on the other hand, relied upon the orders of the lower authorities and submitted that Wipro BPO is a good comparable. 23. We have considered the rival submissions .....

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assessee asked for the complete annual report at the time of the original TP proceedings or the proceedings pursuant to the DRP, the TPO failed to provide the complete annual report of the said comparable to the assessee. If the TPO wanted to use Wipro BPO as a comparable, the onus was on him to provide the complete annual report to the assessee. It is a settled law that onus is on the person who asserts the facts. In any case, we fail to see how without the complete annual report of Wipro BPO, .....

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not be prudent to take this company as a comparable. Ld. DR has not been able to controvert this fact. Since sufficient information for this comparable is not available, we direct exclusion of this company as a comparable as we have done in the case of Avaya India (P) Ltd. vs. Addl.CIT, Range 2, New Delhi in ITA No.5528/Del./2011 for AY 2007-08 order dated 18.09.2015. (v) HCL COMNET SYSTEMS & SERVICES LTD. 24. Ld. AR submitted that the HCL is an industrial giant considering its turnover and .....

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hence it would not have been possible for the assessee to identify the company and at its functional profile for selection as comparable. He further submitted that the said comparable did not appear in the search process of the assessee during the preparation of documentation u/s 10(d), hence, it would not have been possible for the assessee to select the company as a comparable. Ld. AR also submitted that the company had a different year ending than March 2008 and the TPO considered clubbing th .....

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tion. In the said scenario, we uphold the inclusion of the said company in the set of comparables. The assessee fails. (vi) GENESYS INTERNATIONAL 27. The assessee s grievance is that the said company has been included by the TPO by holding as under :- The TPO is in disagreement with the taxpayer regarding horizontals or functional lines within IT enabled services. Neither the taxpayer nor the TPO did go into functional lines / horizontals within IT enabled services. Thus the taxpayer cannot take .....

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information technology enabled products or services to mean: (i) Back Office operations (ii) Call centers (iii) Content development or animation; (iv) Data processing (v) Engineering and design (vi) Geographic Information System services. (vii) Human Resources services. (viii) Insurance Claim Processing. (ix) Legal databases. (x) Medical Transcription; (xi) Payroll; (xii) Remote Maintenance; (xiii) Revenue accounting, (xiv) Support Centers, and (xv) Web site services. As discussed above under t .....

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ctions. These objections of the taxpayer also deserve rejection on the same ground that the TPO has not gone into the functional and vertical lines of the comparable companies on which issue the taxpayer has not raised objections. The taxpayer has not stated anything regarding the peculiar circumstances faced by this comparable. Therefore the company is retained as comparable. 28. Ld. AR submitted that the said comparable company is engaged in provision of geospatial and content providing servic .....

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, the ld. AR took our attention to the Annual Report of Genesys International Corporation Ltd. wherein Schedule M - Company s Background is stated that Genesys International Corporation Ltd. is engaged in providing Geographical Information Services comprising Photogrammetry, Remote Sensing, Cartography, Data Conversion, related Computer based Services and Information Technology enabled and other related Services, whereas the assessee is only engaged in back office support i.e. ITES to its AE and .....

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essee is engaged in the back office support ITES system for its AE in respect of accounting support for hotels and its corporate offices whereas we find that Genesys International Corporation Ltd. is into mapping business and it provides geographical information services comprising Photogrammetry, Remote Sensing, Cartography, Data Conversion, related Computer based Services and Information Technology enabled and other related services, which cannot be by any stretch of imagination be said to be .....

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rping on the CBDT Circular No.SO 890 (E) dated 26.09.2000 which has given the detailed list of product and services that could be claimed under ITES wherein engineering and design as Item No.5, as under :- As can be seen from above, engineering and design services as rendered by the company are in the nature of IT enabled services. Thus, the taxpayer s argument that engineering services rendered by the company are not IT enabled services is incorrect. Hence, all the three services - engineering .....

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