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2015 (12) TMI 903 - ITAT DELHI

2015 (12) TMI 903 - ITAT DELHI - TMI - Transfer pricing adjustment - whether the filter of export sales to total sales of 25% applied by ld. TPO and accepted by ld. DRP is justified or not? - Held that:- Rule 10B(2)(d) is relevant only for CUP method cannot be accepted. All these factors have bearing on the net margin to be determined in all methods including TNM method. We are in agreement with the submission of ld. Sr. DR, reproduced earlier, that those geographical markets in which parties en .....

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comparables had been excluded as they did not pass through export filter applied by ld. TPO. As we have already upheld the export filter applied by ld. TPO in earlier part of our order, we reject the assessee’s contention. - There is no denying of the fact that Infosys BPO operates on a large scale and caters to wide variety of customers operating in different industries. Ld. counsel has filed before us extracts from the annual reports and white paper issued by Infosys in regard to ‘Process .....

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dertaken suck risk and failed to demonstrate how the same material affected from margins. He pointed out that unless it was shown that how the risk adjustment to fetch the result of each comparable and how the same would improve the comparability and unless adequate reasons are given for such adjustment, no adjustment can be allowed to the tax payer. Before ld. DRP also the assessee failed to furnish any data for quantification of risk. Unless the difference can be ascertained accurately and the .....

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ecision in the case of M/s Logix Micro Systems Ltd. (2010 (10) TMI 902 - ITAT BANGALORE). One of the plea of ld. counsel for the assessee was that the entire funds are received from parent company. However, this plea has been taken for the first time and was not taken before lower revenue authorities. Therefore, this aspect also needs to be considered by ld. TPO while deciding this issue de novo. - ITA No. 30/Del/2015 - Dated:- 10-12-2015 - SHRI S.V. MEHROTRA : ACCOUNTANT MEMBER AND SHRI C.M. GA .....

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come of ₹ 20,29,360/-. The AO noticed that assessee had undertaken international transactions with its AEs to the tune of more than ₹ 15 crores. Therefore, in accordance with the provisions of section 92CA of the Income-tax Act, the international transactions, entered into by the assessee with the AEs were referred to the TPO for determination of ALP of the said transactions. 3. Ld. TPO, after considering the TP report and taking into consideration the functional profile of the asses .....

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eing aggrieved with the assessment order, the assessee is in appeal before us and has taken following grounds of appeal: 1. The assessment order passed by the Income Tax Officer, Coy. Ward 1(3), New Delhi [Learned Assessing Officer (Ld. AO')] pursuant to directions of the Hon'ble Dispute Resolution Panel (Hon'ble DRP') is bad in law. 2. The Hon'ble DRP erred both on the facts and in law, in cnfirming the addition to the extent of ₹ 26,722,563 to the income of the Appell .....

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92C of the Act read with Rule 10B and Rule 10D(4) of the Income Tax Rules, 1962 ('Rules'). 4 On facts and in law, the Hon'ble DRP, Ld. AO and Ld. TPO erred in disregarding the doctrine of impossibility of performance in contravening Section 92D of the Act read with Rule 10D(4) of the Rules, which mandate the use of contemporaneous data for the determination of ALP of international transactions. 5. On facts and in law, the Hon'ble DRP erred in confirming the action of the Ld. TPO .....

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up India Ltd. 6 On facts and in law, the Hon'ble DRP, Ld. AO and Ld. AO erred in selection of Infosys BPO Limited, which is not comparable to the Assessee in terms of functions performed, assets employed and risk assumed. 7 On facts and in law, the Hon'ble DRP, Ld. AO and Ld. TPO erred in selection of Eclerx Services Private Limited which is not comparable to the Assessee in terms of functions performed, assets employed and risk assumed. 8 On facts and ,in law, the Hon'ble DRP, Ld. A .....

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I plus 150 basis points i.e 13.25%. 10. On the facts and in the circumstances of the case, the Ld. AO erred In initiating penalty proceedings under section 271 (1)( c) of the Act. 11. On the facts and in the circumstances of the case, the Ld. AO erred in levying interest under section 234B and 234D of the Act. 12 On facts and in law the Ld. AO made computational errors in calculating the tax payable and interest under section 234B and 234D of the Act. 4. Brief facts of the case are that the asse .....

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tion etc. Thus, the functions of the assessee primarily were of providing IT enabled services such as back office operations/ processing centres, bill paying centres, web enabled services, email support, IT help desk etc. to the group entity. 5. The international transactions, entered during the year, were as under: i. Provision of back office support service ₹ 16,38,25,500/- ii. Reimbursement of expenses paid ₹ 3,06,755/- iii. Reimbursement of expenses received ₹ 3,20,944/- 6. .....

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les with an average of 12.55% as against assessee s own margin of 10%. The assessee had used multiple year data in its TP documents. The AO, after considering the assessee s TP report, issued show cause notice, which is reproduced at pages 3 to 11 of ld. TPO s order. 8. While issuing show cause notice, ld. TPO accepted the filter as applied by the assessee, but further proposed to apply following filters: - Companies whose data is not available for the FY 2009-10 are excluded. - Companies whose .....

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having different financial year ending (Le. not March 31,2010) or data of the company does not fall within 12 month period i.e. 01.04.2009 to 31.03.2010, are rejected. - Companies that are functionally different from the taxpayer are excluded. - Companies that are having peculiar economic circumstances are excluded. 9. On the basis of these filters, applied by ld. TPO, ld. TPO rejected 10 comparables selected by assessee. This rejection was mainly on account of excluding those companies which h .....

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qualifies all the filters proposed by TPO 5. Delta Services (I) Pvt. Ltd. 6.67% Rejected, as not fulfilling the filters 6. Informed Technologies Ltd. 12.01% The company ahs ITES income less than 75%. Hence rejected 7. Infosys BPO Ltd. 24.29% 8. KNM Services Pvt. Ltd. . 13.69% Rejected, as not fulfilling the filters 9. Optimus Global Services Ltd. -1.85% Rejected, as not fulfilling the filters 10. Sparsh BPO Services Ltd. 5.97% Rejected, as not fulfilling the filters 11. Crosdomain Solutions Pvt .....

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assed all the filters. 11. As regards assessee s plea of rejecting Crossdomain Pvt. Ltd., ld. TPO pointed out that since the data for financial year 2009-10 was available, therefore, the plea of assessee could not be accepted. 12. The final set of comparables, selected by ld. TPO was as under: Sl. No. Company PBIT/Cost (%) 1 Caliber Point Business Solutions Ltd. 11.4 2 Cosmic Global Ltd. 16.59 3 Inhouse Productions Ltd. 17.3 4 Crossdomain Solutions Pvt. Ltd. 19.66 5 Infosys BPO Ltd. 31.61 6 Acro .....

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ld. TPO observed that an amount of ₹ 5,90,80,860/- was due from AE at the end of the financial year. Ld. TPO, after considering the assessee s submissions, observed that the argument that none of the invoices outstanding more than six months, was found contrary to the facts. He observed that from books of account it is evident that every single day of the year there has been some outstanding towards AE. He bench marked the transactions by applying prime lending rate of SBI plus 500 bps and .....

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ve the following directions: The TPO/AO is accordingly directed to verify the amount of receivables: i) In case the aggregate amount of receivables from the AEs does not exceed ₹ 50 crores, apply Prime Lending Rate of SBI as on 30th June of relevant previous year plus 150 basis points (ii) In case the aggregate amount of receivables from the AEs excess ₹ 50 crores, apply Prime Lending Rate of SBI as on 30th June of relevant previous year plus 500 basis points. 16. Ground nos. 1 & .....

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export filter and the same should not have been applied. 19. Ld. counsel referred to Rule 10A(a), which has now been renumbered as clause (ab), wherein the definition of uncontrolled transaction is given, which means a transaction between enterprises other than associated enterprises, whether resident or non-resident. With reference to this definition, ld. counsel pointed out that filter is not prescribed in law. He pointed out that law itself says that comparison can be with resident or non-res .....

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is of primary importance and TNMM method is less affected by transactional difference at net level. In TNMM method broad comparability of functional profile is to be taken into consideration. He submitted that Rule 10B(2)(d) dealing with the conditions prevailing in the market in which the respective parties to the transaction operate being a relevant condition for deciding the comparability is relevant only in CUP method and not in TNMM method, where margins are considered and not price. He sub .....

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ctly same transaction is not available, then TPO has to adopt some reasonable basis. He submitted that comparables may be functionally same but the same takes into consideration only cost part and selling part cannot be ignored. She submitted that market does influence the price and, therefore, complete transaction has to be considered otherwise we will get distorted picture. 23. Ld. DR has filed detailed submissions in this regard, which are reproduced hereunder: (1) Provisions of Rule 10B(2)( .....

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arties entering into transactions operate is an important factor which influences the price of the transactions. With the geographical market, in which the other party is located, all those factors which influence the transaction price also come into play. If we do not factor in this into our identification of uncontrolled com parables, we would be making an incorrect identification. The main reason for applying export earnings filter is that the assessee is providing its services from India to .....

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stic players:- It is common business sense that every entrepreneur tries to source its goods or services from the cheapest possible market and sell the same to the markets where the goods or the services can be sold at the highest price. A businessman who can source his goods or services from the low cost countries but cannot sell the same in the fully developed and expensive markets obviously loses out to the businessman who has access to the both-sourcing of services from low cost countries an .....

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e India. Since the margins earned by exporting services outside India is bound to be more than the margins earned by rendering services within India, due to the higher price of service in the export sector by using the same low costs, it is clear that non application of this filter will lead not only to inadequate comparison but also an inaccurate. (4) While examining the operational comparability, the operating market i.e. wherein the services are being sold is also important:- While arguing fo .....

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nd also level of competition (as India's share in global software services market is still low). Hence, it is felt that companies with at least 25% of its revenue from export sector will have similar economic circumstances as that of the tax payer. Therefore the companies that are predominantly into the domestic market cannot be compared with the assessee who is a predominantly export oriented service provider. (5) Following cases are relied in this regard. (i) Chiron Behring vaccines Pvt. L .....

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. Ltd. ITA No. l082IHYD12010 Hyderabad-ITAT .. Wherein the use of this filter was approved by the Hon. Tribunal in para 39 of the judgment reproduced below: . "39. The next ground is with regard to rejection of independent comparable companies by TPO/CTT(A) on the basis that they do not have any foreign exchange revenue. We find that the TPO, in the case of back office services segment, has rejected the following five companies on account of the fact that these companies do not generate for .....

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orks out to 5.27 times more than the domestic segment. In the export segment, the earnings will be more due to the fact that they have advantage of time zone and higher productivity etc. It appears that the assessee company agreed that one criterion for selection/rejection of the comparables is FAR analysis. The aforesaid companies do not have any export business for the year under consideration whereas the assessee company has full fledged export business. The functions, risks and assets are en .....

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than the associate enterprise whether resident or non-resident. In our considered view, the reference to resident and non-resident in Rule 10A of IT Rules, is related to the residential status and not related to the domestic or export. Moreover, the Delhi Bench of the Tribunal in the case of Mentor graphics (supra) held that the ALP should be determined by taking results of a comparable transaction in comparable circumstances. Rule 10B(2)(d) also emphasizes that the comparability of the transac .....

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ble companies. (c) Another judgment where this issue is discussed is ITO vs CRM Services India (P) Ltd. 14 Taxmann 96 as below: " 15. Ground no. 4.5 is against rejection of Shreejal info Hubs Ltd. As a comparable case. In this connection, it has been mentioned in the TPO's order that the assessee raised objection and it was submitted that this company is carrying out business of vending information, i.e. customer support or a contract centre. This business is similar to the BPO business .....

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port, it is carrying out the business of information vending by employing calling agents under the brand name "Ask Me", which is essentially a call centre/contract service centre. Therefore, functional profile is same i.e., to furnish information about the client- company. On the other hand, the case of the Id. DR is that Shreejal Info Hubs Ltd. is working for the clients in India while the assessee is providing services in USA, thus, business territories are totally different. 15.2 We .....

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A T held that Domestic Company cannot be compared with the taxpayer who is mainly an exporter. (e) In the case of Mis Ranbxy India 299 ITR (AT) 175 (Del) the ITA T held that economic conditions prevailing in the market including geographical locations, size of market, government order in force, etc are required to be considered. (f) In the case of Mis Vedaris Technology, ITA T, Delhi held that domestic company cannot be taken as a comparable when the taxpayer is mainly an exporter. (6) By consid .....

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ilable in public domain is not sufficient to make the comparison possible some approximation and reasonable assumptions are inevitable. 24. We have considered the submissions of both the parties and have perused the record of the case. The main dispute is whether the filter of export sales to total sales of 25% applied by ld. TPO and accepted by ld. DRP is justified or not. This has resulted in exclusion of those comparables selected by assessee where export to total sales is less than 25%. Admi .....

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prescribes that the comparables can be residents or the non-residents. In our opinion, the submission advanced by ld. counsel cannot be accepted, particularly in view of Rule 10B which prescribes the mode of determination of ALP u/s 92C. Rule 10B(1) prescribes various methods which can be adopted by the tested party to determine the ALP. One of the methods prescribed is transactional net margin method, which is reproduced hereunder: Determination of arm's length price under section 92C. 10B. .....

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account for differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the price in the open market; (iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction; (b) resale price method, by which,- (i) the price at which property p .....

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o arrived at is further reduced by the expenses incurred by the enterprise in connection with the purchase of property or obtaining of services; (iv) the price so arrived at is adjusted to take into account the functional and other differences, including differences in accounting practices, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of gross profit .....

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k-up to such costs (computed according to the same accounting norms) arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transactions, is determined; (iii) the normal gross profit mark-up referred to in sub-clause (ii) is adjusted to take into account the functional and other differences, if any, between the international transaction and the comparable un .....

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tional transactions involving transfer of unique intangibles or in multiple international transactions which are so interrelated that they cannot be evaluated separately for the purpose of determining the arm's length price of anyone transaction, by which (i) the combined net profit of the associated enterprises arising from the international transaction in which they are engaged, is determined; (ii) the relative contribution made by each of the associated enterprises to the earning of such .....

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he profit thus apportioned to the assessee is taken into account to arrive at an arm's length price in relation to the international transaction: Provided that the combined net profit referred to in sub-clause (i) may, in the first instance, be partially allocated to each enterprise so as to provide it with a basic return appropriate for the type of international transaction in which it is engaged, with reference to market returns achieved for similar types of transactions by independent ent .....

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m the international transaction; (e) transactional net margin method, by which,- (1) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or .....

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d by the enterprise and referred to in sub-clause (I) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm s length price in relation to the international transaction. 25. Rule 10B(2) prescribes various factors which have to be taken into consideration for the comparability of an international transaction, which are as under: 10B(2) For the purposes of sub-rule (1), the co .....

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y down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3 .....

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for all the methods, which have been spelt out in Rule 10B(1). Therefore, the submission of ld. counsel that Rule 10B(2)(d) is relevant only for CUP method cannot be accepted. All these factors have bearing on the net margin to be determined in all methods including TNM method. We are in agreement with the submission of ld. Sr. DR, reproduced earlier, that those geographical markets in which parties entering into transactions operate is an important factor which influence the price of the transa .....

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use BPO Services Limited; - Aditya Birla Minacs Worldwide Ltd; - Cameo Corporate Services Ltd; - Delta Services (I) Pvt Ltd; - KNM Services Pvt Ltd; - Sparsh BPO Services Ltd; and - Timex Group India Ltd. 28. All these comparables had been excluded as they did not pass through export filter applied by ld. TPO. As we have already upheld the export filter applied by ld. TPO in earlier part of our order, we reject the assessee s contention. 29. However, as regards Aditya Birla Minacs Worldwide Ltd, .....

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he parties, we restore this issue to the file of ld. TPO to examine the computation of export earnings to total sales as claimed by ld. counsel for the assessee and, if, the same is found to be correct, then this comparable has to be included in the list of comparables. 31. In the result, ground no. 5 is partly allowed for statistical purposes. 32. The next ground no. 6, raised by ld. counsel for the assessee is regarding inclusion of Infosys BPO in the list of comparables. Ld. counsel submitted .....

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ss solutions provider based in US, which enhanced its capability to deliver end to end business solution for its insurance and financial services clients with a compelling value proposition. Thus, ld. counsel submitted that during the year under consideration there was an extraordinary event of merger and, hence, this could not be taken as a comparable. Further, he referred to the significant Accounting Policies and Notes on Accounts, wherein in the company s over- view, it is stated as under: I .....

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ged from Progeon Limited to Infosys BPO Limited with effect from August 29,2006. 34. Ld. counsel submitted that this comparable has been excluded in plethora of decisions by the ITAT, particularly on the ground of economy of scale. In the synopsis filed by assessee, a list of all such cases has been annexed. 35. Ld. Sr. DR referred to the decision of the ITAT Delhi in the case of Agilent Technologies International Pvt. Ltd. Vs. ACIT (ITA no. 6047/Del/2012 dated 14- 6-2013), wherein it has been h .....

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arable cannot be rejected. He pointed out that Actis is a brand and, therefore, assessee was also having intangibles, therefore, out right exclusion of this is not warranted. He, therefore, submitted that the matter should be restored to the AO/ TPO so that inquiry is made in the light of the decision in Agilent Technologies & Chryscapital. 37. Ld. Counsel for the assessee, in the rejoinder, submitted that adjustments can be made only when specific difference can be identified, which has not .....

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to Process Progression Model ( PPM ), a holistic model to transform business processes . 39. A birds eye view of the said model makes it clear that it involves various processes which are aimed at coping with various challenges which impede the business strategy. On the other hand, the assessee s business profile is quite limited and not at all comparable to the optimistic business model of Infosys. The turnover of Infosys was ₹ 1127 crores during the FY 2009-10 as compared to the assessee .....

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s BPO cannot be considered as a comparable to a captive service provider, like assessee. 41. Ld. DR has submitted that Actis is also a brand and, therefore, adjustment should be made for the difference. We are unable to accept this contention particularly because the department has not brought on record any brand value of Actis on record. Moreover, the wide difference in turnover makes it clear that there is wide difference in the brand value of the two companies and, therefore, without quantifi .....

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High Court - In this case it was emphasized that Infosys Technologies Ltd. could not be considered as a comparable being a giant company. The same principle is applicable to Infosys BPO also. 42. In view of above discussion, we direct ld. TPO to exclude Infosys BPO. 43. In the result, ground no. 6 is allowed. 44. The next ground no. 7, raised by ld. counsel for the assessee is regarding inclusion of eClerx Services Limited. Ld. counsel pointed out that this company is a data analytical knowledge .....

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eport of this comparable company, wherein it is stated as under: eClerx Services Limited (eClerx) is a knowledge process Outsourcing (KPO) Company providing data analytics, data management and process improvement solutions to global enterprise clients, eClerx supports its clients through two business units - Financial Services and Sales and Marketing Support. x x x x x x x x x In the Capital Markets division, the Company today provides end-to-end financial transaction support services such as tr .....

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ng Support division, the Company today supports clients in all elements of product and services marketing and sales-with a focus on online support to include content development and management, search engine management, web operations, pricing and customer analytics, product database management and catalog audits. The Company is also pursuing a strategy of creating a portfolio of platform attached services, by creating a suite of services that are complementary to industry standard IT platforms. .....

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tion could be made between the entities rendering ITeS. We find it difficult to accept this view as it is contrary to the fundamental rationale of determining ALP by comparing controlled transactions/entities with similar uncontrolled transactions/entities. ITeS encompasses a wide spectrum of services that use Information Technology based delivery. Such services could include rendering highly technical services by qualified technical personnel, involving advanced skills and knowledge, such as en .....

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ce required to operate the two services would be different. Each of the aforesaid factors would have a material bearing on the profitability of the two entities. Treating the said entities to be comparables only for the reason that they use Information Technology for the delivery of their services, would, in our opinion, be erroneous. 47. After hearing both the parties, we direct the ld. TPO to exclude this comparable from the list of comparables in view of decision of Hon ble Delhi High Court a .....

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ce risk, product risk, idle-time risk, credit risk, foreign exchange fluctuation risk, technology obsolescence risk etc. Hence, the return earned by the comparable companies selected by ld. TPO is not comparable to the rate of return earned by Actis Global. He pointed out that all significant business and entrepreneurial risks are borne by the AEs of assessee who own all the valuable intellectual property rights and other commercial or marketing intangibles. Ld. counsel has furnished a table ela .....

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wer Risk Limited Yes Yes Yes Yes Yes Yes Legal and Statutory Risk Limited Yes Yes Yes Yes Yes Yes Capacity Utilization Risk No Yes Yes Yes Yes Yes Yes 50. Ld. counsel submitted that following the decision of ITAT Delhi Bench in the case of Motorola Solutions India Pvt. Ltd. Vs. ACIT (ITA no. 5637/Del/2011), the matter may be restored back to the file of ld. TPO for necessary risk adjustment after availing the services of technical experts to be appointed by both the parties. 51. Ld. DR referred .....

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ssee failed to show that the comparables had actually undertaken suck risk and failed to demonstrate how the same material affected from margins. He pointed out that unless it was shown that how the risk adjustment to fetch the result of each comparable and how the same would improve the comparability and unless adequate reasons are given for such adjustment, no adjustment can be allowed to the tax payer. Before ld. DRP also the assessee failed to furnish any data for quantification of risk. Unl .....

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was ₹ 3,88,32,043/-. These receivables were from the AE of the assessee itself, for whom services were rendered by the assessee. Accordingly, AO issued show cause notice, inter alia, observing, as under: Accordingly, the above deferred payment/ receivable is proposed to be considered as an international transaction requiring determination of ALP. In absence of any suitable CUP data or credit rating of your AE, interest on the outstanding balance at the end of the year is proposed to be be .....

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ables. (b) Amount, which is more than six months old, should only be considered for accrual of interest. 55. The ld. TPO did not accept both these arguments for the reasons mentioned in his order, for which primarily be observed that the working capital adjustment could not be allowed to service industry and in regard to the details submitted by assessee regarding the period for which balances were outstanding, he observed that the said details contained various errors. 56. Ld. DRP partly allowe .....

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