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2015 (12) TMI 1560 - ITAT DELHI

2015 (12) TMI 1560 - ITAT DELHI - TMI - TPA - selection of comparables - Held that:- Kitco Limited transactions are primarily with government owned enterprises.Applying the preposition laid down in the case of M/s ThyssenKrupp Industries India Private Limited (2013 (11) TMI 930 - ITAT MUMBAI), we hold that Kitco Ltd., cannot be accepted as a comparable company. Hence the same is directed to be eleminated. - TCE Consulting Engineers Ltd.- the Comparable Company is involved in activities beyon .....

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g design segment. Hence the same cannot be accepted as a comparable. - IBI Chematur Ltd. company undertakes substantial R&D activities (R&D expense 5.41% of turnover) which is not a function performed by the assessee. Hence this company cannot be accepted as a comparable. - Accuspeed Engineering Services India Limited and Development Consultants Private Limited - DRP has not given any reasons for rejecting these comparables. On examination of the papers on record, we are in agreement wit .....

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agement and engineering consultancy services like business advice for development planning to engineering design to project management. It is engaged in planning, developing and delivering projects across many sectors such as energy, industry, water and environment to transport, buildings, urban infrastructure and social development. We observe that the Ld.DRP has not given any reasons for rejecting this comparable. We observe that the functions of this comparable company are diversified in natu .....

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c. The company also undertakes software testing and validation activities. Possession of intellectual property rights has to be factored if such a company is to be taken as comparable. This cannot be done unless there is appropriate data. Further, from the TP study we observe that, this company is a wholly owned subsidiary of TCS E serve International Ltd. During the year under consideration, this company has made payments towards use of Tata brand. Consequentially use of the TCS brand has subst .....

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oftware services. It is also submitted by the ld.AR that segmental information in respect of this company is not available. It has been further brought to our notice that this company has been rejected by the Ld.TPO in the earlier year. The company has also had business restructuring during the year under consideration thereby giving rise to extraordinary circumstances. For all these reasons we direct the Assessing Officer to exclude this company as a comparable. - E4e Healthcare Business Se .....

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ement Services Pvt. Ltd. - the financial data of the company is available on the database. The ld. TPO however did not give proper opportunity to the assessee to substantiate the inclusion of this company as a comparable. The issue was carried further before the Ld.DRP, and the Ld.DRP also did not comment upon the economic analysis of the company. We therefore set aside this issue of selecting this company, to be considered by the TPO as a comparable, and to include the same in the event it sati .....

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filters applied by the ld.TPO. - Adjustment on account of Receivables - Held that:- It is brought to our notice that the assessee is a debt free company. In such circumstances it is not justifiable to presume that, borrowed funds have been utilized to pass on the facility to its AEs. The revenue has also not brought on record that the assessee has been found paying interest to its creditors or suppliers on delayed payments. - In lieu of the discussions and the ratio laid down in the cas .....

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a, CIT(DR) ORDER PER BEENA PILLAI, JUDICIAL MEMBER: This is an appeal filed by the assessee against the assessment order dated 30.01.2015, of ld. DCIT Circle 4(2) u/s 143(3) r.w. sec 144C of I.T. Act, 1961 for A.Y. 2010-11. 2. Brief facts of the case are as under: The assessee filed its return of income declaring total income of ₹ 33,42,28,149/-. Subsequently the same was revised to ₹ 33,39,32,080/-. 3. The assessee is a captive service provider, providing (a) engineering design and .....

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. 5,50,04,596/- 4. Reimbursement of expenses(paid) 6,70,973/- 5. Reimbursement of expenses(received) 21,97,07,529/- 4. For benchmarking the international transactions, assessee selected TNMM as the most appropriate method (MAM), with Operating Profit to Total Cost(OP/TC) as Profit level Indicator (PLI). The approach followed by the assessee in the TP Study has been encapsulated in the table below: Nature of International Transaction Amount (In INR crores) Most Appropriate Method & Profit Lev .....

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od: TNMM PLI: OP/TC 5. The ld. TPO disagreed with the various filters used by the assessee in the TP study. The detailed submissions, workings and evidences provided during the course of the TP assessment proceedings, was considered by the ld. TPO, and thereafter he selected the final set of comparables based on the application of additional/modified filters in all three segments. The final comparable adopted by ld. TPO are as under: I. Engineering design and related services S. No. Company Name .....

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6. Infosys BPO Ltd. 31.61% 7. TCS E-Serve International Ltd. 51.51% 8. TCS E-Serve Ltd. 66.35% 9. Jindal Intellicom Ltd. 14.19% 10 . Microland Ltd. -3.11% Mean 29.30% III. IT Infrastructure support services S. No. Company Name OP/Cost (Forex as operating) (%)* 1. Accentia Technologies Ltd. 43.62% 2. Cosmic Global Ltd. 18.28% 3. E4e Healthcare Ltd. 32.67% 4. Fortune Infotech Ltd. 19.62% 5. iGate Global Solutions Ltd. 18.21% 6. Infosys BPO Ltd. 31.61% 7. TCS E-Serve International Ltd. 51.51% 8. T .....

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e by ld. TPO has been presented below: S. No. Nature of international transaction Appellant's margin Arm's length margin determined by ld. TPO Adjustment u/s 92CA (in INR) 1. Provision of engineering design and related services 13.04% 21.00% 8,05,09,189 2. Provision of FAS services 15.00% 29.30% 54,91,653 3. Provision of IT Infrastructure support services 17.56% 29.30% 56,83,008 4. Outstanding Receivables N.A. 3,10,93,116 Total 12,27,76,966 8. Aggrieved by the draft assessment order of t .....

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nd FAS services: The DRP accepted the approach and the comparable set considered by ld. TPO. All additional comparables proposed by the assessee in the fresh search were rejected. Also, the DRP accepted the approach of the ld. TPO which was to adopt the same set of comparables for both these segments. The DRP directed the ld. TPO/Ld. Assessing Officer to make working capital adjustment. The DRP also confirmed the TP adjustment made by the ld. TPO on account of interest on intercompany receivable .....

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d FAS services: S. No. Company Name Working Capital adjustedOP/TC 1. Accentia Technologies Ltd. 41.24% 2. Cosmic Global Ltd. 18.80% 3. e4e Healthcare Ltd. 30.41% 4. Fortune Infotech Ltd. 20.89% 5. iGate Global Solutions Ltd. 24.43% 6. Infosys BPO Ltd. 30.80% 7. TCS E-Serve International Ltd. 54.67% 8. TCS E-Serve Ltd. 63.88% 9. Jindal Intellicom Ltd. 13.43% 10. Microland Ltd. -1.05% Mean 29.75% 10. The final adjustments made by the ld. AO are as under: S. No. Nature of transaction Adjustment (in .....

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addition of INR 15,45,32,767/- to the returned income of the Appellant by re-computing the arm s length price of the international transactions pertaining to all three segments of the Appellant Company viz. engineering services, financial support and IT infrastructure support u/s 92 of the Act. Thus, in passing the order, the ld. AO/ld. TPO/ld. DRP erred in: 1.1Rejecting the comparable companies adopted by the Appellant in its transfer pricing documentation on the basis of additional/modified q .....

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. AO/TPO/ld. DRP erred in selecting the current year (i.e. financial year 2009-10) data for comparability despite the fact that at the time of preparation of Transfer Pricing Documentation by the Appellant, the complete data for financial year 2009-10 was not available within the public domain. 2. That without prejudice to the above, if comparables selected the ld. AO/TPO/DRP that do not meet the parameters of functional comparability are accepted, then the comparables selected by the Appellant .....

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the case and in law, the ld. AO has erred in initiating penalty proceedings u/s 271(1)(c) of the Act. The Appellant craves leave to add, amend, alter, delete, rescind, forgo or withdraw any of the above grounds of appeal either before or during the course of the proceedings before the Hon ble Income Tax Appellate Tribunal in the interest of the natural justice. The aforesaid grounds are mutually exclusive and without prejudice to each other. 11.1 We have heard the rival contentions. On a carefu .....

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n 1972 by Industrial Development Bank of India, other national and state level financial institutions, Government of Kerala and 7 public sector banks for rendering services to government departments, public sector undertakings ( PSU s ), local bodies, entrepreneurs, etc. The company s main functions are to render professional technical consultancy assistance to banks (appraisal of projects in priority sectors) and to entrepreneurs operating in SME sector (preparation of project report, market st .....

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owned undertaking, rendering services primarily to central/state government undertaking and PSUs. It is not in dispute that most of the clients or projects undertaken by this company are either for state government or government run institutions. The majority revenue (and profitability) of this company comes from government (state or center) run projects and that the company derives benefit out of its parental relation with the Government in getting contract. In other words, the company is getti .....

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rs India Limited is a Government company. It has several segments which also include Turnkey project page 700 of the paper book is a copy of annual report of Engineers India Limited on turnkey project. It can be seen that the revenue has arisen from completing paraxylene plant of IOCL and further that company is engaged in execution of other unit of IOCL s Panipat Naphtha cracker project. In our considered opinion this case should not have been included in the list of final comparables for two r .....

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fore, order for the exclusion of this case from the list of comparables. Unquote [Emphasis Supplied] 12.5 In the above ruling, the comparable M/s. Engineers India Limited was rejected primarily on the ground that it was working for government/public sector undertakings and since the company also being a government owned enterprise; the transactions tantamount to related party transactions. The same is true for the said comparable as Kitco Ltd., transactions are primarily with government owned en .....

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diversified functions of this comparable company include pre-project activities, procurement assistance, project management, commissioning and coordination, inspection, construction and supervision. Further, there is no segmental accounting in the annual report of the Company which provides profitability, for the engineering design segment. Hence the same cannot be accepted as a comparable. 3) IBI Chematur Ltd. 12.7 The comparable Company is involved in activities beyond engineering design which .....

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over) which is not a function performed by the assessee. Hence this company cannot be accepted as a comparable. Now we take-up the comparables selected by the assessee company but rejected by DRP/ld.TPO, which are in dispute: 4) Accuspeed Engineering Services India Limited 12.8 The ld. TPO in his order, has rejected the said comparable based on its functional profile, holding that the comparable company is involved in software services. The Ld.AR submitted that this comparable company is not int .....

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ment with the submissions of the ld. AR. Hence we direct the A.O to include this company as a comparable. 5) Development Consultants Private Limited 12.9 The ld.TPO/DRP rejected the comparable company on the ground that it is functionally different, without providing any reason thereof. The Ld.AR submitted that this comparable company provides engineering consultancy services for the entire gamut of project engineering and other pertinent activities namely, vendors design and drawing review, det .....

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r F.Y. 2009-10 is not available in public domain. The ld.AR submitted that though the annual report for F.Y. 2009-10 of this comparable company is not available, this comparable company is functionally similar as it provides services related to engineering projects like feasibility studies, design & engineering, construction management, project management, inspection, operational assistance and business & technology consulting. The ld.AR submitted that, annual report for F.Y.2010-11is av .....

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his comparable company is involved in the provision of multi-disciplinary management and engineering consultancy services like business advice for development planning to engineering design to project management. It is engaged in planning, developing and delivering projects across many sectors such as energy, industry, water and environment to transport, buildings, urban infrastructure and social development. We observe that the Ld.DRP has not given any reasons for rejecting this comparable. We .....

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etworks, storage equipment, managing etc. The services include data centre and system management, infrastructure management, web hosting and internet excess, desktop solution etc. 13.2 In the FA segment, the functions of the appellant company are, invoice processing, help desk support, account closing and management reporting, tax advisory services, management of fund. The assessee contended that the ld. TPO/ DRP has accepted certain comparables, which perform altogether different functions as c .....

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sk management, and analytics, and has created a lot of applications which are in the nature of intellectual property in terms of reconciliation software, fund transfers, etc. The company also undertakes software testing and validation activities. Possession of intellectual property rights has to be factored if such a company is to be taken as comparable. This cannot be done unless there is appropriate data. Further, from the TP study we observe that, this company is a wholly owned subsidiary of .....

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to development of software products for healthcare. It is submitted by the ld.AR that Accentia Technologies Ltd is also engaged into diversified activities such as Knowledge Process outsourcing(KPO), Legal process outsourcing(LPO), Data process Outsourcing(DTO), high end software services. It is also submitted by the ld.AR that segmental information in respect of this company is not available. It has been further brought to our notice that this company has been rejected by the Ld.TPO in the earl .....

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ved that segmental information in respect of this company is not available. The company is also a 100% EOU, under STPI guidelines. We are therefore inclined to accept the contention of the assessee that this company should be excluded as a comparable. Hence we direct the Assessing Officer to do so. Comparable company selected by the assessee, but rejected by DRP/ld.TPO: 1) Omega Healthcare Management Services Pvt. Ltd. Ld. TPO has rejected the company on the basis that the annual report is not a .....

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that this company is basically into ITES business. The ld. TPO has rejected the company on the ground that financial statement of the company was not available. However, the financial data of the company is available on the database. The ld. TPO however did not give proper opportunity to the assessee to substantiate the inclusion of this company as a comparable. The issue was carried further before the Ld.DRP, and the Ld.DRP also did not comment upon the economic analysis of the company. We the .....

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s, activation services and system integration services and is also involved in the provision of comprehensive payments processing solutions like ECS processing and cheque processing services. It is further submitted that the Annual report for FY 2009-10 is available in public domain, and can be used for the purpose of margin computation. The ld. TPO has rejected the company on the ground that financial statement of the company was not available. The issue was carried further before the Ld.DRP, a .....

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ant time period. The ld.TPO ascertained that payment for invoices raised by the assessee has not been paid within the stipulated time as provided in the service agreement and accordingly treated the delayed payments as loan facility advanced to the AE s. The ld.TPO charged 14.88% interest for the delayed period, beyond a period of 30 days. The ld. DRP upheld the adjustments made by the ld.TPO. 14.8. The ld.AR submitted that during the financial year, the assessee had entered into international t .....

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he assessee does not earn any interest on the current account maintained with the bank. Except for interest earned from fixed assets, the assessee has not earned any interest, on any advances paid to third parties. The ld.AR further submitted that being a captive undertaking, the assessee does not render similar services to any other concern. He submitted that, excess credit period arises, only when there is a standard credit period for the services sold at the same price to independent enterpri .....

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