TMI Blog2016 (7) TMI 321X X X X Extracts X X X X X X X X Extracts X X X X ..... ugh cost also for arriving at the operative cost/operating cost and the decision relied upon by the ld.A.R cited above have no application. - Decided against assessee. Suitable adjustments to account for differences in the risk profile of the assessee and its comparables - Held that:- We direct the TPO to allow risk adjustment at 1% as decided in the case of M/s.HELLOSOFT INDIA (P.) LTD. Vs. DCIT. [2014 (4) TMI 72 - ITAT HYDERABAD ] Carry forward of current year unabsorbed depreciation - Held that:- It is held by the Hon’ble Karnataka High Court in the case of CIT Vs. Himatsingka Seide [2006 (8) TMI 125 - KARNATAKA High Court] held that brought forward depreciation had to be adjusted against the profit of the EOU before computing exemption allowable u/s.10B of the Act - I.T.A.No.1026/Mds./2014 - - - Dated:- 27-5-2016 - SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND Shri Duvvuru RL Reddy, JUDICIAL MEMBER For The Appellant : Mr.Saroj Kumar Parida,Advocate For The Respondent : Mr.Milind Madhukar Bhusari, JCIT,DR ORDER PER CHANDRA POOJARI, ACCOUNTANT MEMBER This appeal of the assessee is directed against the assessment order passed u/s.143(3) read with se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (5) r.w.s 144C(d 20.12.2013 directing the TPO to exclude the foreign exchange gain as well loss from the financials of the assessee company and rework the ALP accordingly. The DRP also directed the AO to allow the provision made for loss on derivative contracts as an expenditure after examining the consistency of method of accounting followed by the assessee in preceding or following years. 3.2 ld.A.R submitted that the assessee outsources the work to its Indian associate Vetri Software India Pvt. Ltd and to many other independent units that carry out the data entry work on a continuous basis. The entire outsourced work is classified under DATA CONVERSON CHARGES in the P L A/c amounting to ₹ 29,84,16,215/- ,which also include the amount paid to its wholly owned subsidiary Vetri Software of ₹ 8,55,83,359/- during the A.Y 2009-10. This work is merely on outsourced job-work having no nexus with the actual operating income and expenses of the assessee. It should therefore, be excluded from both the income and expenditure of the assessee while computing the PLI. The TPO observed in the TP order that the assessee has rendered ITES to it s A.E. During the course of procee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties have been considered and orders of the authorities below have carefully been perused. The only question that falls for our consideration is with regard to the method of computing profit/TC margin whether on gross basis as done by the TPO or net basis as worked out by the assessee. In this case the assessee has applied TNM method to determine ALP, which has also been accepted by the Revenue authorities. The comparables cited by the assessee has also been accepted by the TPO as appropriate. It is also found by us that in the regular financial accounts maintained by the comparable companies, the comparables recognize revenue on a net basis. The assessee has also recognized revenues on a net basis in its financial account, which had been duly audited by the auditor. The assessee has computed the margin of operative profit on the total cost on the basis of net revenue by way of mark-up received from the associate concern. The payment made by the assessee to third party vendor/media agencies for and on behalf of the principal has not been included in the total cost for determining the profit margin, though, on the other hand, the TPO has included the payment reimbursed by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tself, or alternatively, depending on the type of comparable data being used, the mark-up on the cost of services should be lower than would be appropriate for the performance of the services themselves. In this type of case, it will be appropriate to pass on the cost of rendering advertising space, to the credit recipient without a mark-up and to apply a mark-up only to the costs incurred by the intermediary in performing its agency function. These guidelines are as under : 3.41 In applying the transactional net margin method, various considerations should influence the choice of margin used for example, these considerations would include how well the value of assets employed in the calculations is measured (e.g. to that extent there is intangible property the value of which is not captured on the books of the enterprise) and the factors affecting whether specific costs should be passed through, marked-up, or excluded entirely from the calculation. - - - - - 42. Further, OECD in ITS 2009 Transfer Pricing Guidelines has laid down as under : 7.36 When an AE is acting only as an agent or intermediary in the provision of services, it is important in applying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in translation, audit and medical transcription business. As against it, the assessee is engaged in data processing service. The assessee company has developed a web portal incurring expenditure in earlier years for the development, launch, and sustain maintenance and up-gradation of the portal but during the period no income is generated from it. Ld.A.R further submitted that Cosmic Global Ltd., is into development of intangible asset for its future benefit whereas the assessee does not develop any such intangible asset. The ld.A.R also submitted that there is a higher level of skill required in employees of Cosmos Global Ltd as compared to the assessee. Further, he relied on the judgment of Delhi High Court in the case of Rampgreen Solutions Pvt Ltd. Vs. CIT in ITA No.102 /2015 vide order dated 10.08.2015 specifically following:- 31. 1n the present case, the Tribunal noted that Vishal and eClerx were both engaged in rendering ITeS. Th Ttiluna1 held that, once a service falls under the category of ITeS, then there is subclassification of segment Thus, according to Tribunal, no differentiation could be made between the entries rendering ITeS. We find it difficult to accept th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the key success factors of the BPO Industry is its ability to move up the value chain through KPO service offering. For the aforesaid reasons, the Special Bench of the Tribunal held that ITeS Services could not he bifurcated as BPO and KPO Services for the purpose of comparability analysis in the first instance. The Tribunal proceeded to hold that a relatively equal degree of comparability can be achieved by selecting potential comparables on a broad functional analysis at ITeS level and that the comparables so selected could be put to further test by comparing specific functions performed in the international transactions with uncontrolled transactions to attain relatively equal degree of comparability. 34. We have reservations as to the Tribunal s aforesaid view in Maersk Global Centers (India) Pvt. Ltd. (supra). As indicated above, the expression BPO and KPO are, plainly, understood in the sense that whereas, BPO does not necessarily involve advanced skills and knowledge; KPO, on the other hand, would involve employment of advanced skills and knowledge for providing services. Thus, the expression KPO in common parlance is used to indicate an ITeS provider providin. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable would not be warranted and the transfer pricing study must take that into account at the threshold. 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 he similar in material aspects. The comparability must be judged on factors such as product/service characteristics, functions undertaken, assets used, risks assumed. This is essential to ensure the efficacy of the exercise. There is sufficient flexibility available within the statutory framework to ensure a fair ALP. 37. Applying the aforesaid principles to the facts of the present case, it is once again clear that both Vishal and eClerx could not be taken as comparables for determining the ALP. Vishal and eClerx, 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, eCler ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Services Ltd., is in providing end to end healthcare services which are higher value added services requiring high skilled employees as against simple data entry service provided by the assessee. The ld.A.R has also submitted that E4e-Healthcare Business Services Ltd., has not incurred any employee expenditure cost. Further, the ld.A.R submitted that E4e-Healthcare Business Services Ltd., has also acquired Nittany Outsourcing Ltd., in 2006 is changed into E4e-Healthcare Business Services Ltd effectively from June 22, 2009. 4.2.1 On the other hand, ld.D.R relied on the order of DRP. 4.2.2 We have heard both the parties and perused the material on record. The assessee s main plea that E4e-Healthcare Business Services Ltd., is providing end to end healthcare services which are higher value added services requiring high skilled employees as against simple data entry service provided by the assessee. However, the assessee has not placed any details of the employees regarding their qualification or skill. Further, the acquisition of M/s.Nittancy Outsourcing Ltd. by M/s. E4e-Healthcare Business Services Ltd., in the year of 2006, which is no relevance to the assessment year 2009- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egarding M/s.Allsec Technologies Ltd., the ld.A.R submitted that M/s.Allsec Technologies Ltd., is not a persistent loss making company and losses are only due to the economic down turn in the international market which has affected the procurement of new business. With regard to acquisition of M/s.Indian Domestic Contract Management Services Division of i2i Telesource Pvt. Ltd., the ld.A.R submitted that the total value of acquisition is only 4.76 crores which is less than 5% of the total turnover of the company. ld.A.R submitted that it should not have been rejected as comparables. 4.6.1 On the other hand, ld.D.R submitted that the TPO had applied diminishing revenue /persistent losses including the F.Y 2008-09 are rejected as comparables. The TPO has excluded all those companies with persistent losses/diminishing revenues as IT sector is growing at a CARG (Compounded Annual Growth Rate) of more than 50% during the last 10 years or at least for the last here years. Furhter, the ld.D.R pointed out that the assessee is remunerated on cost plus basis i.e. it is a cost protected entity. Therefore, M/s.Allsec Technologies Ltd., cannot be compared with the financial healthy company l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Vs. DCIT cited supra wherein held as follows:- 18. As regards 4th issue relating to risk filter, as submitted by the learned AR, this issue is also covered by the decision of the coordinate bench in assessee's own case for AY 2005-06 and 2006-07 (supra), wherein the coordinate bench vide para 17, held as follows: 17. We have heard the submissions of the parties in this regard. The materials on record clearly prove the fact that the assessee is a captive service provider. It has transactions only with its AE. It is also a fact that all the risks lies with the AE. Different benches of the Tribunal have also taken a divergent view on this issue. The Income-tax Appellate Tribunal, Mumbai Bench in the case of Simontech (supra) has held that no separate adjustment is required on account of risk and functional difference, the Incometax Appellate Tribunal Delhi Bench in the case of Sony India (P.) Ltd. v. Dy. CIT [2008] 114 ITD 448 has held that deduction on account of ownership of intangibles, risk factors can be allowed. In aforesaid view of the matter, we are inclined to accept the view favourable to the assessee. We therefore uphold the direction of the CIT (A) in this rega ..... X X X X Extracts X X X X X X X X Extracts X X X X
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