Subscription   Feedback   New User   Login      
Tax Management India .com
TMI - Tax Management India. Com
Articles Highlights TMI Notes SMS News Newsletters Calendar Imp. Links Database Experts Contact us More....
Extracts
Home List
← Previous Next →

EXL Service Com (India) Pvt. Ltd. Versus ACIT, Circle-11 (1) , New Delhi and Vice-Versa

Transfer pricing adjustment - comparable selection - Held that:- Considering the judicial precedent in assessee’s own case the Ld. CIT DR stated that as far as the calculations are concerned the issue has to be verified by the TPO and in the face of the order of the Co-ordinate Bench as the issue has to go back it was submitted that he would have no objection if the calculations as considered by the TPO are taken on record and the departmental ground is allowed. The Ld. AR in reply submitted the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

er the straight line method. - Applying the principle that only companies which are on similar standard can only be comparables Fortune Infotech Ltd. is excluded from the list of the comparables in view of the fact that it holds unique intangibles which position is not disputed by the Revenue. - ITA. No. 1940/Del/2008 and ITA No. 1982/Del/2008 - Dated:- 16-10-2015 - SMT DIVA SINGH, JUDICIAL MEMBER AND SH. INTURI RAMA RAO, ACCOUNTANT MEMBER. Appellant by Sh. Ajay Vohra, Sr. Adv., Sh. Neeraj J .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

s length price made by TPO/AO. 2. The appellant craves leave to add, alter or amend any ground of appeal raised above at the time of the hearing. ITA No.1940/Del/2008 1. That the Commissioner of Income-tax (Appeals) erred on facts and m law in sustaining addition to the income of the appellant to the extent of ₹ 18,85,44,612 on account of adjustment to the arm's length price of the 'international transactions' of transaction processing and interest and voice based customer car .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ation received by the appellant should contain an clement of fixed return and a variable component based on risk assumption. 2.2. That the Commissioner of Income-tax (Appeals) erred on facts and in law in not appreciating that the arrangement between the appellant and the associated enterprises was not that of a captive service provider inasmuch as the appellant is responsible for effective utilization of its resources and the associated enterprise does not assure minimum level of utilization. i .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

parables on account of the marketing functions / risk undertaken by the associated enterprises even while holding the appellant to be a hybrid / captive service provider. 3.1. That the Commissioner of Income-tax (Appeals)/ TPO erred on facts and in law in not making adjustment to the operating results of the appellant on account of: i) idle I abnormal costs on account of excess or unutilized capacity ii) higher rate of depreciation considered by the appellant in the audited accounts. 4. The Comm .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

, i.e., idle establishment cost was substantially high and losses were bound to occur, while determining the arm's length price applying Transactional Net Margin Method ( TNMM") . b. That the Commissioner of Income-tax (Appeals) erred on facts and In law In law in not applying the operating profit margin of the appellant over a period of business cycle (i.e., when the appellant was operating at optimum capacity) for comparing operating results of the established enterprises rendering si .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

in applying operating results for the relevant previous year as opposed to the contemporaneous data available at the time of effecting the Transfer Pricing documentation. a. The Commissioner of Income-tax (Appeals) erred on facts and in law in disregarding the multiple year data of operating results of the preceding two years of comparable companies relied upon for application of TNMM and accepted by the TPO. b. The Commissioner of Income-tax (Appeals) erred on facts and in law in considering on .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ied upon for application of TNMM as per the proviso to rule 10B(4) of the Rules. 6. That the Commissioner of Income-tax (Appeals) erred on facts and in law in not appreciating that no adjustment was required to be made to the arm' s length price of the 'international transactions considering that the operating profit margin of the appellant was higher than some of the comparable companies identified in the Transfer Pricing documentation or by the TPO or by the Commissioner of Income-tax .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

bstantial erosion of net worth and having significant related party transactions. 2. Apex Logical Data Conversion Pvt. Ltd. Rejected due to non-availability of data. 3. Compudyne WIngosystems Rejected due to very low turnover to net fixed asset ratio, low employee cost to total cost ratio and having a distinctly different functional profile. 4. Giltedge Infotech Services Ltd., ND Rejected due to non-availability of data. 5. Mapro Industries Rejected due to non-availability of financial data for .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

parable companies for benchmarking analysis applying TNMM on the ground that current year operating results of each said company were not available. b. Without prejudice that the Commissioner of Income-tax (Appeals) erred in not considering the preceding year's operating results of Apex Logical Data Conversion Pvt. Ltd. and Giltedge lnfotcch for the purpose of benchmarking analysis applying TNMM. 9. That in case benchmarking had to be done using current year's data, then the lower author .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

fit to justify transfer pricing adjustment in the hands of the appellant. 11. Without prejudice that the Commissioner of Income-tax (Appeals) erred in not appreciating that no adjustment to the arm's length price of international transactions' was warranted considering the overseas associated enterprises as tested parties for benchmarking analysis applying TNMM. 12. Without prejudice that the Commissioner of Income-tax (Appeals) erred on facts and in law in not allowing variation to the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

appellant after considering the disallowance of provision for expenses amounting to ₹ 36,52,675. 15. That the Commissioner of Income-Tax (Appeals) erred on facts and in law in sustaining levy of interest under sections 234B and 234C of the Act. The appellant craves leave to add, amend, alter or vary from the above grounds of appeal before or at the time of hearing. 2. Addressing the grounds raised the Ld.AR invited attention to the summary of Transfer Pricing adjustment filed in the Court .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

. The services are thereafter outsourced to the assessee and the assessee thereafter execute such contract by rendering IT enabling services to the clients/customers. It was submitted that since the business is provided to the assessee by the AE i.e EXL US and the assessee only performs part of the business outsourcing services which are outsourced to the assessee by the AE where all significant corporate management functions i.e business strategy and development investor relationship management .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

entire marketing effort is undertaken by the EXL US who bears the consequent risks and rewards. The assessee on the other hand it was submitted is exposed to the following risks:-(i) risk on account of receivable from its customers; (ii) marketing risk; (iii) price risk; (iv)recovery risk; (v) credit risk etc. However as far as the warranty risk is concerned it was submitted the risk is borne by the AE. In the event the customer is dissatisfied with the services provided by the assessee then the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

dit risk etc. Thus appropriate downward adjustment it was submitted would be required for comparing operating profit margin of the assessee with the operating profit margin earned by the full fledged entrepreneur companies to establish the comparability. In support of the said submission, reliance was placed upon Intelligent India Technology Pvt. Ltd. vs ITO (ITA No.-1237/Bang./2010); DCIT vs Hello Soft India Pvt. Ltd. 153 TTJ 322; and Excellence Data Pvt. Ltd. vs ITO (ITA No.159/Hyd./2014.). Ha .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

issue be decided in favour of the Revenue. 4. Having heard the submissions and considered the order of the ITAT in assessee s own case in the light of the submissions of the parties, Ground No.2 alongwith the sub-grounds is dismissed following the order of the Co-ordinate Bench. 5. Addressing Ground No.-3.1 & 4 wherein the assessee agitates the adjustment on account of the idle capacity, the Ld.AR has canvassed that 95% of the total revenue of the assessee came from Conseco . As a result of .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e loss of its major business from Conseco the average ideal time of the employees was as high as 23.40%. Attention was invited to paper Book page 78 to 82. The capacity utilization considering the seating capacity on triple shift basis it was stated was as low as 27%. Accordingly appropriate adjustments for un-utilized capacity relying upon Paper Book pages 78 to 82 was prayed for. The jurisprudence in support of such an action it was submitted is available. Reliance was placed on the following .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

5.1. Reliance was also placed on the decision of the dated 10.07.2014 in ITA No.3547/Del/2010 in the case HCL Technologies BPO Services Ltd. vs ACIT (copy filed).after considering various decisions including the decisions has mandated such an adjustment. Accordingly relying upon Paper Book page 7882 it was his submission that after excluding the abnormal cost the operating profit margin of the assessee, the operating cost ratio to work out to 27.92% as against 12.80% in the case of the comparabl .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ctfully following the orders of the Tribunal, the issue is restored back to the file to the TPO for verification and necessary relief. 8. Addressing the issue raised in Ground No.3.1(ii) the Ld.AR submitted that the assessee follows an aggressive method of depreciation of its assets which would be evident from a perusal of its balance sheet. The assessee it was submitted depreciates its assets at a higher rate than as per Schedule XIV to the Companies Act, 1956. For the year under consideration .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ed by the TPO in line with the rates of depreciation charged by the assessee under the SLM. Accordingly, it was submitted if the OP/OC ratio of the comparable companies considered by the CIT(A) is considered then it worked out to -15% and if OP/OC ratio of comparables considered by the TPO is considered then it works out to 8.4%. Since the average operating profit margin of the assessee is at -3.14% then the international transactions undertaken by the assessee it was submitted would be at arms .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

sion Pvt. Ltd 14.30% 22.26% 17.80% 4. Compudyne WIngosystems Ltd. 0.18% 52.78% 20.05% 5. Fortune Infotech limited 107.46% 68.03% 96.87% 6. Mapro Industries Limited (4.19)% 21.43% 6.09% 7. Necleus Netsoft and GIS India Ltd. (17.70)% (10.37)% (13.92)% 8. Twinstar Software Exports Limited (73.35)% (25.81)% (45.80)% 9. Zigma Software Limited 0.78% 17.05% 6.96% Mean 12.73% Appellant s Margin (AY 04-05) 3.14% Appellant s margin (AY 04-05 & 05-06) 11.42% 8.3. These calculations it was submitted wer .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

peal before the CIT(A) who deleted the Apex Logical Data Conversion Pvt. Ltd. one of the comparables retained by the TPO and instead introduced two new comparables namely Nucleus Netsoft & GIS India Ltd. and Karvy Consultants Ltd. As a result of this, it was submitted the CIT(A considering the four comparables finally at page 47 concluded that the average of the OP/TC margin of 12.03% was to be taken as the basis of the results of the four comparables. For ready-reference the four comparable .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

the Co-ordinate Bench vide its order dated 22.12.2014 upheld the claim of comparability adjustment on account of higher rate of depreciation charged by the assessee in its book of accounts it was submitted that if the Revenue s appeal was to be allowed than considering the comparables retained by the TPO the following position would emerge:- Comparable companies considered by the CIT(A) S. No. Name of the Company OP/TC (%) OP/TC(%) after depreciation adjustment 1. Ace Software Exports Limited 1 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

4.41% 3. Nucleus Netsoft & GIS India Ltd. 16.87% -37.85% 4. Karvy Consultants Limited -5.37% -5.37% Arithmetic Mean 12.80% -15.00% Appellant s margin -3.14% 10. Considering the judicial precedent in assessee s own case the Ld. CIT DR stated that as far as the calculations are concerned the issue has to be verified by the TPO and in the face of the order of the Co-ordinate Bench as the issue has to go back it was submitted that he would have no objection if the calculations as considered by t .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

comparables retained by the TPO in line with the rates of depreciation charged by the assessee under the straight line method. Accordingly departmental appeal is allowed and Ground No.3.1(ii) of the assessee is also allowed for statistical purposes. 12. Qua Ground No.7 the assessee prays for exclusion of Fortune Infotech Ltd. The request for such a relief was based on the argument that the said company has extraordinary profits during the year. This fact it was submitted is evident from its Annu .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

of Fortune in 2003-04 assessment year however while so holding the Bench returned a finding that Fortune Infotech in 2003-04 Financial year relevant for 2004-05 assessment year developed its own intangibles thus in the year under consideration it was submitted it should be excluded as a comparable. For ready-reference, the relevant extract from the order at paper book page 117-118 is reproduced hereunder:- 8.3. Turning to the facts of this company, we find that the ld. AR has harped on higher O .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

next year, a copy which is available on pages 178 onwards of the paper book. In his message to the shareholder, the Managing Director of the company stated that the year ending 31st March 2004 (i.e. succeeding year) was a year of consolidation in which it sacrificed immediate profits for much larger gains by preparing ourselves for future growth . The Annual report of this company for the next year indicates that it developed its own intangibles in such next year. These factors indicate that fin .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ort of this company that it was an abnormal year of its operations in which it sacrificed immediate profits for larger gains in future by developing its own intangible. It is further relevant to note that the functional profile of this company is similar to that of the assessee company as it is also a BPO, as is the assessee. It was not due to some inadvertence that the assessee initially included this company in the list of comparables. It can be seen from page 43 of the impugned order that thi .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

o section 92C(2) provides that where more than one price is determined by the most appropriate method, the ALP shall be taken to be the arithmetical mean of such prices. It therefore, transpires that the Indian legislation talks of considering all the comparables and then finding out the arithmetic mean of the price/profit of such comparables. Unlike some countries adopting interquartile range, which is also called middle fifty, the Indian legislation stipulates for calculating arithmetic mean o .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ial available on record. It is seen that the Co-ordinate Bench in the case of 24/7 Customer.Com Ltd. (cited supra) vide its decision dated 09.11.2012 for 2004-05 assessment year has taken into consideration that the said company i.e M/s Fortune Infotech Ltd. Fine had developed its own software called fine tran and image index for performing specialized services in medical prescription and patients record management. In these circumstances, we are of the view that a comparable company which has d .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

assessment year where this fact was not in existence. Accordingly applying the principle that only companies which are on similar standard can only be comparables Fortune Infotech Ltd. is excluded from the list of the comparables in view of the fact that it holds unique intangibles which position is not disputed by the Revenue. 15. Addressing Ground no.10 it was submitted by the Ld.AR that on facts there was no transfer of profit by the assessee to AE in other jurisdictions. The issue in assesse .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

Solutions Pvt. Ltd. vs CIT (ITA No.102/2015) of the Delhi High Court. 16. The Ld. CIT DR relying upon the decision of the ITAT in assessee s own case in the 2003-04 assessment year submitted that he would want to rely on the detailed finding therein on similarity of facts and circumstances and it was further stated that facts of no two case can be identical. 17. We have heard the rival submissions and perused the material available on record where the ground is raised only to keep the issue ali .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

rovision of expenses disallowed the same holding that the provision on adhoc basis was to be added back to its income as the expenses had not been incurred by the assessee. In appeal the CIT(A) partly allowed the assessee s appeal following the view taken in 2003-04 assessment year. The position has been considered by the Co-ordinate Bench in the aforesaid order. For readyreference, it is reproduced hereunder:- 9. Having dealt with all the issues raised by the ld. AR on the addition towards tran .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

that the assessee created provision for expenses to the tune of 5,18,03,004/- and claimed deduction for the same. As the assessee failed to furnish specific bills for which the above provision was made, the AO made addition of equal sum. The ld. CIT(A) observed that the assessee was not provided adequate opportunity of adducing necessary evidence in support of its claim of provision for expenses. After considering the relevant material furnished by the assessee, the ld. CIT (A) deleted addition .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

 

 

 

 

 

what is new what is new
  ↓     bird's eye view     ↓  


|| Home || Acts and Rules || Notifications || Circulars || Schedules || Tariff || Forms || Case Laws || Manuals ||

|| About us || Contact us || Disclaimer || Terms of Use || Privacy Policy || TMI Database || Members || Site Map ||

© Taxmanagementindia.com [A unit of MS Knowledge Processing Pvt. Ltd.] All rights reserved.

Go to Mobile Version