TMI Blog2014 (10) TMI 862X X X X Extracts X X X X X X X X Extracts X X X X ..... cumstances being satisfied by the finding arrived at which has been reproduced in the earlier part of this order, we dismiss the departmental ground. - I.T.A. No. 6043/Del/2012, Co. 7/Del/2013 - - - Dated:- 17-10-2014 - Diva Singh (Judicial Member) And T. S. Kapoor (Accountant Member) For the Petitioner : Yogesh Kumar Verma For the Respondent : Arun Chabra ORDER Diva Singh (Judicial Member) I.T.A .No.-6043/Del/2012 The present appeal has been filed by the Revenue against the order dated 28.09.2012 of CIT-XX, New Delhi pertaining to 2005-06 assessment year on the following grounds:- 1. whether on the facts and in law, the Ld. CIT(A erred in directing to delete addition on a/c of adjustment of arm s length price since: (i) The assessee has itself included Vishal Technologies Ltd. in its TP study Report and this business model does not impact the financial profile hence it should not be excluded as a company. Moreover, it is not demonstrated that the marketing unit has material impact on the performance of a company. (ii) The assessee has not been able to demonstrate that the difference in the working capital deployed is making a difference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjudication. 5.1. Brief facts of the case are as follows:- Heartland Delhi is a subsidiary of Heartland Asia (Mauritius) Limited with 99.99 per cent of shareholding held by it and 0.01 percent held by Heartland Medical Information Services Inc., USA. Heartland Delhi is primarily engaged in the provision of IT enabled services in the area of medical transcription to Heartland Medical Information Services Inc. The company undertakes the medical transcription services exclusively for Heartland Medical Information Services Inc., USA. The medical transcription business was carried out by an undertaking owned by the appellant which is a 100 percent Export Oriented Unit ( EOU ) registered under the 'Software Technology Park Scheme' ( STPI ) of the Department of Electronics, Government of India (hereinafter referred to as eligible undertaking ). The eligible undertaking was set up during the Financial Year ( FY ) 1998-99 relevant to the Assessment Year ( AY ) 1999-2000. Heartland Delhi, is an IT enabled back-office medical transcription service provider to its associated enterprises and is remunerated on a total cost plus basis for the services performed. During the fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tegory (b) and (c) services. Also, the services carried on by the amalgamated company (i. e Nucleus Netsoft GIS India Ltd) are neither segmented into IT Enabled Service nor into Software Development Service. Further, though the Notes to Accounts of the company has provided for a policy of recognizing revenue from IT Enabled Services and Software Development service but there are nil revenues from the said streams. The relevant extracts of the Annual Report are provided vide Annexure B for your kind perusal. Bearing in mind the aforesaid, your assessee would like to submit that it acts as captive service provider engaged in providing IT Enabled Service (medical transcription), the same has been elucidated in terms of Transfer Pricing: Documentation for the relevant year under consideration. Accordingly, Nucleus Netsoft GIS India Ltd., (engaged in providing IT Enabled services as well as development of software product) should not be taken as a comparable for determining the arm's length price. Further, as evident in terms of financial disclosures made by Nucleus Netsoft GIS India Lid., that the revenues for the period under consideration are not generated by performing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the submission of the appellant as well as the order of the TPO. From the perusal of the Audited accounts of Nucleus Netsoft GIS (India) Ltd., it is clear that there was an amalgamation process during this year. The amalgamation came into effect from 01.04.2005. The abnormal increase in the profit margin of the company as compared to the earlier year may or may not due to the impact of the process. However, as the amalgamation came into effect from the next year, the independent existence of the company stands clear for the FY 2004-05. In view of this, I do not find any merit in the submission of the appellant. Therefore, this company stays in the set of comparables. 7. Vishal Information Technologies Ltd.: The submission of the appellant in this regard is reproduced below: (The appellant vide his submission dated June 17, 2008 and August 25, 2008 (Please refer Appendix-A, page no. 770 and 793 of paper book) before ld. TPO has submitted the reasoning for rejecting the company. In addition to the submissions made before ld. TPO the appellant humbly submits that, per website, the company is engaged in IT Enabled Service particularly in the area of print produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erely functioning as a distributor for such services. Wherein, the company is a distributor for services, it does not perform the function which is normally associated in performing IT Enabled services. Further the Wages/Total cost of Vishal Information Technologies Limited for the FY 2004-05 is 1.38% as against 78.28% of the appellant, which clarifies that this company is not functionally comparable to the appellant. The relevant extracts of the Annual Report are provided vide Annexure for your kind perusal. Also, per the information available on the website, the company has a marketing unit, VSoft Technologies UK, which undertakes to perform marketing activities for Vishal Information Technologies. In the process, Vishal Information Technologies would stand to directly benefit from the marketing efforts and customer contracts that would be obtained by VSoft Technologies. In contrast, your appellant does not have any marketing arm and hence does not benefit from any sales promotion activity. It operates strictly offshore, as a captive medical transcription service provider. The relevant extracts are provided vide Annexure for your kind perusal. Accordingly, your app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in house whereas Vishal Information technologies Ltd. Outsources its activity. The business model of the appellant is different from this company. For the AY 2005-06, the Hon ble ITAT in case of Maersk Global Service Center (India) Pvt. Ltd. (supra) has held that Vishal Information Technologies Ltd. Is not a comparable company for the reason that it outsourced its work. As the fact and circumstances of these two cases are similar, respectfully following the decision of the Hon ble ITAT, I hold that Vishal Information Technologies Ltd. Should be excluded from the list of comparables. 4. The Ld. CIT DR addressing the department s grievance to the finding in para 7.1 merely places reliance upon the TPO s order. However the specific reasoning taken by the CIT(A) on query was not opposed by him by making reference to any contrary fact, circumstance or position of law. 5. Ld. AR on the other hand relying upon the impugned order contended that the assessee has objected to the said comparable i.e Vishal Information Technology Ltd. during the assessment proceedings as well as before the CIT(A). It was argued that the mere fact that it was wrongly selected in the TP documentation b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0, page no.-755-756 - Capital IQ Information Systems (India) (P.) ITA No.1961/Hyd/2011, para 17, page no.790 - M/s Brigade Global Services Pvt. Ltd. vs ITO [ITA No.-1494/Hyd/2010], para 46, page no.-994 - BA Continuum India Pvt. Ltd. vs DCIT, Cir-1(3), ITA No.1154/Hyd/2011, Hyderabad, para 24-27, page no.772-773 - PTC Software (India) Pvt. Ltd. vs ACIT, Circle-4, ITA No.-1605/PN/2011, Pune, para 31, page no.-777 - Avineon India Private Limited vs. DCIT, Cir-1(1), ITA no.1606/Hyd/2010 Hyderabad para 16, page no.766 - 24/7 Customer .Com Pvt. Ltd. vs DCIT, Cir11(2) I.T.A.No.227/Bang/2010 para 17.3 page no.801 - M/s Google India Pvt. Ltd. vs DICT, Circle-4, ITA No.1368/Bang/2010 para 15, page no.780 6. We have heard the rival submissions and taken ourselves through the case law filed. On a consideration of the same we are of the view considering the judicial precedent that the finding arrived at in the impugned order deserves to be upheld. The fact remains that Vishal has a different business model is a consistent fact on record qua the said comparable which finding has not been rejected by the Revenue. Following the judicial precedent the departm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... WC is financed; either through own source or through borrowed funds. (ii) terms and conditions of receipts and payments i.e. terms of payments of debtors and creditors (iii) inventory management through backward forward linkages, the efficiency of holding inventory. Interest cost is a financial cost. In order to cover the interest cost, the margin may seem to be high in absolute term, but when interest cost is accounted for, the margin changes its luster. Therefore, working capital requirements materially affect the margins or prices, costs or profits. These material effects are clearly identifiable from the Profit Loss account and Balance Sheet of the tested party as well as of comparables. Therefore, a reasonably accurate adjustments can be made to eliminate the material effects of such differences as contemplated u/s 10B(3) of IT Rules. Rule l0B(3) of the Rules provides that an uncontrolled transaction shall be comparable to an international transaction if: None of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the prices, costs or the profit ari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der economic circumstances that warrant further adjustments to the margins earned by the comparable companies in order to make the comparison appropriate. Therefore I hold that the claim of the appellant for working capital adjustment is reasonable and justified. This ground of the appellant is sustained. 9. Aggrieved by this the Revenue is in appeal before the Tribunal. The Ld. CIT DR places reliance upon the TPO s order and submitted that the assessee has not been able to show the impact of working capital deployment on comparables. 10. The Ld. AR on the other hand relying upon the impugned order submitted that adjustment on account of deployment in working capital is required to be made for comparability analysis. It was contended that it is an accepted principle in terms of Rule 10B(3) of the Income Tax Rules, 1962 which provides for adjustment to eliminate the material differences. The position it was submitted is also substantiated by the OECD Guidelines 2010 and judicial precedent it was submitted on the issue is consistently in assessee s favour.Reliance was placed on the following decisions:- - Mercer Consulting (India) vs. DCIT-ITA No.966/Del/2014, para 16.2 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such an adjustment should not be granted in appellant s case. - Also while adjudicating appellant s case the Ld. CIT(A) had granted working capital adjustment to the appellant after taking into account the workings submitted by the appellant during the appellate proceedings and after a detailed reasoning for such actions. Accordingly there is no infirmity in the order of Ld. CIT(A and therefore the appellant humbly requests your Honours been upheld in the following cases:- - M/s Toyota Kirloskar Motor (P.) Ltd. vs. ACIT [IT(TP)A No.1315/Bang/2011] para 50, page no.920 - ACIT vs. NGC Network (India) Pvt. Ltd. [ITA No.5307/M/2008] para 15, page no.- 932. 11. We have heard the rival submissions and perused the material available on record. On a consideration of the same we find that the finding arrived at in the facts as they stand cannot be faulted with. The assessee consistently has sought right from the assessment stage the adjustments for working capital deployment in its comparables, the working has been placed before the AO and again before the CIT(A). Whereas ld. AO on principle held it to be not allowable, the CIT(A) considering the same has come to the find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons and perused the material available on record. It is seen that the said issue was decided by the CIT(A) in the following manner:- 11. The appellant had claimed that the TPO has not given any risk adjustment. From the perusal of the TP documentation, it is clear that the appellant has not made any effort to justify such adjustment. The onus of working of risk adjustment is on the appellant. As it is, quantifying risk is a difficult risk. The adjustment if at all, it should be made to the comparables. In the absence of requisite information about the comparables, the claim of the risk adjustment was rightly not granted by the TPO. Therefore, this ground of the appellant is dismissed. 19. It is seen that even before us the position remains the same as no working of risk adjustment has been provided by the assessee. In view of the peculiar factual position the consistent finding on record qua the issue is upheld as the onus for providing the risk adjustment sought to be claimed has not been discharged by the assessee. Accordingly Ground No 3 of the CO is also dismissed. 20. In the result the appeal of the Revenue and the CO filed by the assessee are dismissed. The or ..... X X X X Extracts X X X X X X X X Extracts X X X X
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