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2016 (1) TMI 116 - ITAT DELHI

2016 (1) TMI 116 - ITAT DELHI - TMI - Transfer pricing adjustment - selection of comparable - Held that:- From a perusal of the order of the DRP, it is clear that the assessee’s objections / contentions against the inclusion/exclusion of the comparables has not been dealt by the DRP while exercising the appellate jurisdiction against a quasi-judicial order of the TPO, which exercise is sine qua non for deciding the issue as to whether a comparable is comparable to the FAR of the tested party i.e .....

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the file of DRP for fresh adjudication. Ex consequenti, the DRP order is set aside and the matter remanded back to the file of the DRP for passing a speaking order in respect of all the grounds raised before it and has to deal with each of the comparables contested above by the assessee. Needless to say that when considering the arguments in respect to selection of the comparables, the DRP must keep in mind the following aspects:-

(a) Companies with extra ordinary circumstances, like .....

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ay be kept in mind by the DRP while addressing the objections in respect to inclusion / exclusion of comparables and pass a speaking order after giving adequate opportunity to the assessee. - Decided in favour of assessee for statistical purposes - ITA No.5906/Del./2012 - Dated:- 18-9-2015 - SHRI J.S. REDDY, ACCOUNTANT MEMBER and SHRI A.T. VARKEY, JUDICIAL MEMBER For The Assessee : Shri Kanchan Kaushal, FCA and Shri Ravi Sharma Advocate For The Revenue : Shri Bhaskar Goswami, Senior DR ORDER PER .....

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providing services in following two segments:- (i) Information Technology enabled Services (hereinafter referred to as ITES ) - Information technology enabled network management / technical support and other back-office support services in the nature of remote monitoring and maintenance of the Equant s global network platforms and services, coordination and remote configuration and implementation of quality customer networking solutions to its Group Company in Ireland, Equant Network Services I .....

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with its AEs which were duly reported in the Accountant s Report (Form No 3CEB) filed along with the return of Income :- Sr.No. Nature of Transactions Value (Rs.) Method Applied Outcome after DRP 1 Provision of Information Technology Services Provision of ITES services 1,32,75,03,839 Transactional Net Margin Method (TNMM) ADJUSTMENT Provision of CSD services 2 Purchase of fixed Assets 48,44,593 Accepted 3 Reimbursement of expenses paid 2,58,57,152 Accepted 4 Interest on loan 1,89,13,353 Comparab .....

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% 15.03% Assessee's OP/TC considering forex gain/Loss as operating in nature 17.47% 17.47% 5. The TPO, after rejecting the assessee s benchmarking study in the TP report as well as the fresh search provided by the assessee, undertook a fresh search using current year data on his own accord using arbitrary quantitative and qualitative filters and proposed a set of 20 comparables in case of CSD services with mean OP I TC margin of 26.16% (23.38% after working capital adjustment) and 21 compara .....

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The assessee filed detailed objections before the Dispute Resolution Panel ( DRP ) against the adjustment made by the AO. The DRP directed the AO/TPO to provide benefit of the +1-5% range and to verify the margin computations of the comparables proposed in the TP Order. 7. Based on Ld. DRP Directions, the adjustment made by the Ld. TPO to the CSD segment was deleted as the arm s length mark-up of 23.38% was within the + 1-5% range of the mark-up of the assessee. Further, the Ld. TPO verified the .....

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No. Name of the company Working capital Adjusted (OP/TC)% 1. Accentia Technologies Ltd 39.60% 2. Aditya Birla Minacs Worldwide Ltd. -9.12% 3. Asit C. Mehta Financial Services Ltd. 6.93% 4. Caliber Point Business Solutions Ltd 6.72% 5. Coral Hub Limited (Vishal Information Technologies Ltd) 38.13% 6. Cosmic Global Ltd. 23.42% 7. Crossdomain Solution P Ltd. 25.40% 8. Datamatics Financial Services Ltd (BPO Division) 32.60% 9. e4e Healthcare Business Solutions P. Ltd. (earlier known as Nittan Outsou .....

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ge 25.26% 9. The AO, in conformity with the TP order, upheld the adjustment and proceeded to issue the draft assessment order u/s 144C(1) of the Act. 10. Aggrieved with the DRP directions as well as final assessment order, the assessee filed an appeal before the Income Tax Appellate Tribunal (ITAT). 11. The main grievance of the assessee is in respect to inclusion / exclusion of comparables. 12. Ld. AR contended that business restructuring activities /mergers / amalgamations / extra ordinary cir .....

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012) (AY 2008-09) • Capital IQ Information Systems India Pvt. Ltd. v. DCIT [ITA NO.124/Hyd/2014 & ITA No.170/Hyd/2014 (AY 2009-10) • Mindteck (India) Ltd (IT(TP)A.No.70/Bang/2014)(AY 2009-10) Further, Accentia has very low employee cost to sales ratio during FY 2007-08 :- Particulars Amount (In Rs.) Sales & Services (A) 509,346,944 Employee Cost (B) 60,018,773 Salary & allowances to staff 54,844,678 Salaries to directors 1,560,000 Contribution to ESI 38,507 Contribution to .....

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d that standalone segmental information is not available. Ld. AR relied on the following case laws :- • Vodafone India Services Pvt. Ltd. (formerly 3 Global Services P. Ltd.) (ITA No. 7140/Mum/2012 and ITA NO. 7097/Mum/2012)(AY 2009-10) • Maersk Global Service Centres (India) Pvt Ltd (ITA No. 2594/Mum/2014 (AY 2009-10) • TNS India Pvt Ltd (ITA No.604 & 419/Hyd/2014)(AY 2009-10) • BNY Mellon International Operations (India) Pvt. Ltd. [TS-3S8-ITAT-2014(PUN)-TP) (AY 2009-10) .....

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d. AR also submitted that during the year, Asit has transferred business of the company s ITES business to a wholly owned subsidiary - Nucleus GIS and ITES Ltd. Ld. AR relied on the decision of Avineon India Pvt.Ltd (ITA No.1989/Hyd/2011) (AY 2007-08) (iii) Mold -Tek Technologies Limited ( Mold-Tek ) Ld. AR submitted that in the case of comparable, demerger took place in this year and took our attention to Exhibit 9. He submitted that during the year, Mold-Tek demerged with Teckmen tools limited .....

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e laws :- • Symphony Marketing Solutions India Pvt. Ltd [IT(TP) No. 1316/Bang/2012] A.Y 2008-09) • Lionbridge Technologies Pvt Ltd (ITA No.7498/Mum/2012)(AY 2008-09) • Cognizant Technology Services Pvt. Ltd. [ITA Nos.2106/Hyd/2011](AY 2007-08) and 1864/Hyd/2012 (AY 2008-09) • Zavata India Private Limited (ITA No. 1781/Hyd/2011) (AY 2007-08) (iv) Wipro Ltd. (Seg.) (Wipro) Ld. AR submitted that amalgamation took place in this year and took our attention to Exhibit 11. He submit .....

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atents. Further, the audited annual report of Wipro does not disclose any segmental information and the TPO has relied on information u/s 133(6). Ld. AR submitted that the following comparables are functionally different :- (v) Crossdomain Solution P Ltd. ( Cross Domain ) Ld. AR submitted that this comparable company is in the business of software development services and took our attention to Exhibit 9. He submitted that Cross Domain provides software development services along with product lif .....

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clerx ) Ld. AR submitted that this comparable company is engaged in the business of high end knowledge process outsourcing services and took our attention to Exhibit 5. Ld. AR submitted that Eclerx is a Knowledge Process Outsourcing (KPO) company engaged in providing data analytics and data process solutions to the customers and it provides Sales & Marketing Services (comprising Online Operations Support, Offline Operations & Data Management and Competitive Pricing & Catalog Analytic .....

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on Services Pvt. Ltd (ITA No.6312/Del/2012)(AY 2008-09) • Lionbridge Technologies Put Ltd (ITA No.7498/Mum/2012)(AY 2008-09) • Market Tools Research Put Ltd (ITA No.1811/Hyd/2012)(AY 2008-09) • Symphony Marketing Solutions India Pvt. Ltd [IT (TP) No.1316/Bang/2012] (AY 2008-09) • Cognizant Technology Services Put. Ltd. [ITA Nos.2106/Hyd/2011](AY 2007-08) and 1864/Hyd/2012 (AY 2008-09) • Maersk Global Service Centres (India) Pvt. Ltd (ITA No.2594/Mum/2014) (AY 2009-10) &b .....

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HVAC), Electrical, Plumbing, Steel Detailing, External Utilities and Building Information Modeling (BIM). Ld. AR relied on the following case laws :- • Symphony Marketing Solutions India Pvt. Ltd [IT (TP) No.1316/Bang/2012] (AY 2008-09) • Market Tools Research Pvt. Ltd (ITA No. 1811/Hyd/2012)(AY 2008-09) • INS India Pvt. Ltd (ITA No. 604 & 419/Hyd/2014) (AY 2009-10) • Excellence Data Research Pvt Ltd (ITA No.159/Hyd/2014)(AY 2009-10) • Capital IQ Information Systems .....

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vices segment which are primarily in the nature of back- office support, remote monitoring co-ordination etc. services. Ld. AR relied on the following case laws :- • Symphony Marketing Solutions India Pvt. Ltd [IT(TP) A.No. 1316/Bang/2012] (AY 2008-09) • Hyundai Motors India Engineering Pvt. Ltd (ITA No. 1850/Hyd/2012) (AY 2008-09) • Capital Health Group Information Services Pvt Ltd (ITA No.6312/Del/2012)(AY 2008-09) • Capital IQ Information Systems India Put. Ltd. u. DCIT [I .....

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f accounting (cash as well as mercantile) which may have impacted the profitability of the company during the year. DIFFERENT BUSINESS MODEL (x) Coral Hub Limited (Vishal Information Technologies Ltd) ( Coral Hub ) Ld. AR submitted that this comparable company has different business model and took our attention to Exhibit 3. He submitted that Coral Hub outsources most of its services to third party contractors which is evidenced by the low employee cost to sales ratio of the company and the comp .....

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articulars Amount Sales (A) 380,784,348 Personnel cost (B) 11,140,357 Employee Cost Filter (B)/(A) 2.93% Ld. AR relied on the following case laws :- • Cummins Turbo Technologies Ltd. UK - India Branch (ITA No. 161 & 26/PN/2013) (AY 2008-09) • United Health Group Information Services Pvt Ltd (ITA No. 6312/Del/2012)(AY 2008-09) • 24 x 7 Customer.com Pvt. Ltd.(ITA No. 227/Bang/2010) • BNY Mellon International Operations (India) Pvt. Ltd (ITA No.2380/PN/2012) (AY 2009-10) Ld. .....

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r competitive position by managing their business processes in addition to providing increased value, whereas the assessee s activity with regard to provision of outsourced business processes, like, remote monitoring and maintenance of AEs network platforms and co-ordination etc. services is low-end in nature bearing minimal risks. Ld. AR further submitted that Infosys BPO earns higher profits on its cost on account of its highly established brand in the marketplace and Infosys BPO spends amount .....

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Hyd/2014)(AY 2009-10) • International Specialty Products (I) Pvt Ltd (ITA No. 218/Hyd/2014) (AY 2009-10) • Capital IQ Information Systems India Pvt. Ltd. v. DCIT [ITA No.124/Hyd/2014 & ITA No.170/Hyd/2014] (AY 2009-10), Ld. AR submitted that the following comparables fails financial year filter :- (xii) H C L Comnet Systems & Services Ltd ( HCL Comnet ) (Segmental) Ld. AR submitted that the comparable company fails financial year ending filter and took our attention to Exhibit .....

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The ld. AR took our attention to pages 21 & 22 of the DRP order wherein the objection of the assessee and DRP observation are given as under :- 3.7 Without prejudice to assessee s other contentions, failing to apply the wages/ sales ratio filter to the ITES comparables (as applied vis-a-vis the CSD comparables) and thereby adopting an inconsistent stand between the ITES and CSD comparables and applying this filter selectively only to the CSD comparables, more so when the said filter was appl .....

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e and adequate application of mind with the singleminded intention of making an addition to the returned income of the Assessee; 3.9 Including certain companies that are not comparable to the Assessee in terms of functions performed assets employed and risks assumed; 3.10 resorting to arbitrary rejection of low-profit / loss making companies based on erroneous and inconsistent reasons; 3.11 excluding certain companies on arbitrary/ frivolous grounds even though they are comparable to the Assesse .....

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ignoring the business/ commercial reality that since the assessee (vis-a-vis both its ITES/ CSD services) is remunerated on an arm s length cost plus basis, i.e. it is compensated for all its operating costs plus a pre-agreed mark-up based on a benchmarking analysis, the Assessee undertakes minimal business risks as against comparable companies that are full fledged risk taking entrepreneurs, and by not allowing a risk adjustment to the Assessee on account of this fact; and Assessee relied on Me .....

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e security (5 year zero coupon Govt. Bond). Further mechanical adjustment cannot be made to the margins of the comparables without knowing which risk was taken by the entity concerned and how its profitability was affected. Even methodology, whether ad hoc adjustment as in case of Sony India, CAPM as suggested by the assessee, or Sharpe Ratio (which is a measure of the excess return on risk undertaken by an entity investing in a particular asset), as applied by Hyderabad ITAT in the case of ADP .....

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3.14 disregarding judicial pronouncements in India in undertaking the TP adjustment. DRP/s Observation: The assessee has objected to disregarding judicial pronouncement in India in undertaking TP adjustments. 3.14.1 The assessee itself has contended that this is a general ground. On examination DRP finds that the persuasive value of various ITAT decisions has been acknowledged by the TPO and distinction on facts and law made based facts of the case. In the circumstances, this being a general gr .....

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