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2015 (12) TMI 361 - ITAT DELHI

2015 (12) TMI 361 - ITAT DELHI - TMI - Transfer pricing adjustment - selection of comparables - Held that:- A company cannot be considered as comparable because of exceptional financial results due to mergers/demergers. See Petro Araldite (P) Ltd. Vs. DCIT [2015 (3) TMI 1010 - ITAT MUMBAI]. In view of the fact that there was a merger by way of amalgamation during the year itself, we hold that Nucleus Netsoft and GIS (India) Ltd. cannot be considered as comparable due to this extraordinary financ .....

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In view of this different business model adopted by Vishal Information Technology Ltd. (now known as Coral Hub Ltd.) vis-à-vis the assessee, we order for the omission of this company from the list of comparables.

Kirloskar Computer Services Limited (Seg.) and Mercury Outsourcing Management Ltd. - TPO is directed to include the operating profit/operating costs of the ITES segment of these companies in the final set of comparables, after due verification of the necessary figures for de .....

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in the assessee’s favour in earlier years by holding such interest on short-term deposits to be in the nature of `Business income’ and thereby eligible for the benefit of deduction u/s 10A/10B. - ITA No.3532/Del/2014 - Dated:- 15-10-2015 - SHRI R.S. SYAL, AM AND SHRI KULDIP SINGH, JM For The Assessee : Shri Nageshwar Rao, Advocate, For The Department : Shri Peeyush Jain, CIT, DR ORDER PER R.S. SYAL, AM: This appeal by the assessee arises out of the final order dated 28.4.2014 passed by the Asse .....

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r was restored to the file of the DRP for passing a fresh speaking order giving proper reasons. That is how, the DRP issued direction dated 21.3.2014, pursuant to which, the AO has passed the impugned order. 3. The first issue raised in this appeal is against the addition amounting to ₹ 28,30,09,294/- on account of transfer pricing adjustment. The facts apropos this issue are that the assessee is a wholly owned subsidiary of American Express International Inc., USA. It is engaged in provid .....

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-2 covering transactions from Sl. No. 7-11. In the instant appeal, we are concerned only with international transactions of Category-1 which are as under :- Sl.No. International Transaction Method Value (in Rs.) 1. Export of data processing and back office support TNMM 478,99,69,898 2. Charges for CDN/CPU TNMM 28,73,83,112 3. Charges for Global Max Software TNMM 31,92,769 4. Secondment of personnel TNMM 5,95,75,184 5. Relocation of expenses TNMM 1,04,05,294 6. Reimbursement of expenses TNMM 1,55 .....

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Indicator (PLI) of Operating profit/Operating cost (OP/OC). Initially, it chose 13 comparable companies with their weighted average margin, calculated on the basis of multiple year data, at 15.20%. The assessee computed its own margin at 17.43% and claimed that these international transactions were at arm s length price (ALP). The AO made a reference to the TPO for determining the ALP of the international transactions. The TPO, inter alia, did not accept the use of multiple year data. The assess .....

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2006 1. Ace Software Exports Limited 7.92% 2. Allsec Technologies Limited 28.84% 3. CS Software Limited 18.77% 4. Nucleus Netsoft and GIS (India) Limited 44.83% 5. Spanco Telesystems and Solutions Limited (Segmental) 20.82% 6. Transworks Information Services Limited 24% 7. Tricom India Limited 52.56% 8. Vishal Information Technologies Limited 48% Mean 30.71% 5. On the basis of the above mean profit margin of the comparable companies, the TPO proposed transfer pricing adjustment of ₹ 5.41 .....

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Computer Services Limited and Mercury Outsourcing Management Ltd. We will deal with these companies in seriatim. 6. Before arriving at a conclusion about the comparability or otherwise of the above referred four companies, it is pertinent to observe the nature of functions performed by the assessee under Category-1 of the international transaction in dispute. First transaction is Export of data processing and back office support , whose nature has been discussed in the Transfer Pricing Study Re .....

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th the transacted value of ₹ 28.73 crore. The nature of this transaction has been given in the TP study report to mean utilization of World Wide Information Processing Telecommunication Centre at Phoenix in the USA maintained by another AE. The utilization of Consolidated Data Network (CDN) and Central Processing Unit (CPU) and Technology services is for rendering I.T. enabled services to its AEs. The next international transaction under Category-1 is Charges for Global Max Software with t .....

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seconded employees are utilized by the assessee in rendering I.T. enabled services to its AEs. Then it is Relocation of expenses , which is, again, nothing, but, the reimbursement of cost incurred by the associated enterprises on relocation of employees seconded to it. If we closely look at the nature of the international transactions under Category-1, it becomes manifest that these are the transactions in the nature of rendering or enabling to render I.T. enabled services. There is no dispute .....

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O included it in the final set of comparables despite the assessee s objection that there was amalgamation of some other company in this company during the year under consideration and the audited financial accounts contain the figures relevant to the amalgamating company as well. The TPO was unconvinced with this reason for exclusion. The DRP affixed its seal of approval on the inclusion of this company. 7.2. We have heard the rival submissions and perused the relevant material on record. The a .....

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n ble High Court of Judicature of Bombay on 22nd February, 2006. On complying with the requisite formalities, the Scheme became effective and operative retrospectively from the appointed date of 1 April 2005 as per the Scheme. In the accompanying financial statements, results of the transferor company have been incorporated and the figures given herein and elsewhere in this Annual Report are not strictly comparable with those of previous year. It is clear from the above extraction that the amalg .....

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be considered as comparable because of exceptional financial results due to mergers/demergers. Similar view has been bolstered by the Delhi Bench of the Tribunal in several cases including Ciena India Pvt. Ltd. Vs. DCIT (ITA No.3324/Del/2013) vide its order dated 23.4.2015. In view of the fact that there was a merger by way of amalgamation during the year itself, we hold that Nucleus Netsoft and GIS (India) Ltd. cannot be considered as comparable due to this extraordinary financial event. Accord .....

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the ground that the functional differences pointed out by the assessee were not significant enough to warrant its rejection as a good comparable. The assessee argued before the DRP that this company outsourced a significant part of its operations, inasmuch as such outsourcing charges constitute 65.98% of the total costs and that was one of the reasons rendering it incomparable. Though the DRP upheld the inclusion of this company, but it did not adversely comment on this aspect of outsourcing of .....

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overall profitability of a company. Several Benches of the Tribunal across the board have unanimously held this factor to be a relevant one in deciding the question of exclusion of a particular company from the list of comparables. Copies of some of such orders expunging companies on this score have been placed by the ld. AR on record. In view of this different business model adopted by Vishal Information Technology Ltd. (now known as Coral Hub Ltd.) vis-à-vis the assessee, we order for t .....

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t the TPO has accepted the functional comparability of these companies on segmental level. The ld. DR was also fair enough to candidly accept the functional similarity of the relevant segment of these companies. In such circumstances, the question arises as to whether the relevant segment of these companies can be excluded from the list of comparables merely on the ground that the revenue from this segment is very limited? In our considered opinion, the quantum of turnover can be no reason for t .....

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ts low turnover. In principle, we direct the inclusion of the relevant segment of these companies in the list of comparables. The TPO is directed to include the operating profit/operating costs of the ITES segment of these companies in the final set of comparables, after due verification of the necessary figures for determination of their operating profit margin etc. 10. In the final analysis, we set aside the impugned order and remit the matter to the file of AO/TPO for a fresh computation of t .....

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