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Pangea3 and Legal Database Systems Pvt. Ltd. Versus Income Tax Officer, Ward-3 (2) (4) , Mumbai and Vice-Versa

2017 (3) TMI 267 - ITAT MUMBAI

TPA - determining the net profit margin - whether all operating expenses should be taken into account and once any item is appearing as an operating cost which is taken into determining the PLI, then there cannot be any reason to exclude any part of the cost subsequently in the garb of making comparability adjustment? - Held that:- We are unable to fully subscribe to such proposition above because, even if an item is taken as an operating cost, however the rule as enshrined under 10B (1)(e)(iii) .....

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traordinary event which has arisen specific in the case of the ‘tested party’ then same needs to be analysed, firstly, by comparing it with uncontrolled transactions with independent entity; and secondly, if such peculiarity is not found in the case of the uncontrolled comparable transactions then the rule envisages that reasonable accurate adjustment should be made which materially affects the cost or profit. Hence, the contention put forth by Ld. CIT DR in our humble opinion is not acceptable. .....

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assessee vis-ŕ-vis the comparables, then our rules under the Indian Transfer Pricing provisions also enshrines that any material difference affecting the cost or profitability between the international transaction and comparable uncontrolled transaction needs to be eliminated by making suitable adjustments. Here in this case, a material difference has arisen in the case of the assessee due to abnormal feature which is qua the assessee in this particular year, (which is abnormal loss on cancellat .....

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e of the assessee which is the tested party. We accordingly direct the TPO/AO to make the adjustment of this amount in the operating cost and rework the PLI. - Selection of comparables - Held that:- Assessee company cannot be regarded as low end ITES service provider because engagement of qualified and professional lawyers for providing legal outsourcing services is definitely high end services - ITA No.2128/M/2014, ITA No.1958/M/2014 - Dated:- 6-3-2017 - SHRI AMIT SHUKLA, JUDICIAL MEMBER AN .....

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order dated 30.12.2013 u/s. 144C(5) for the AY 2009-10. Since issues involved in both the appeals are same, therefore same are taken up together. 2. In the assessee s appeal, following grounds of appeal have been taken: GROUND NO. 1: The Ld. AO has erred in law and on facts and in circumstances of the case in assessing the total taxable income at ₹ 5,47,61,076 as against the returned income of ₹ 11,61,076 and making adjustment of ₹ 5,36,00,000 in respect of the international tr .....

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e Appellant had not used earlier years' data and misdirected itself in erroneously alleging that the Appellant had used earlier years' data. 3. GROUND NO. 3: The Ld. AO/TPO/DRP ought to have accepted the operating profit margin of the Appellant at 15% and the operating profit margin of the comparable cases at 5.04% as worked out by the Appellant as per TP Study. 4. GROUND NO. 4: The Ld. AO/TPO/DRP erred in holding that the data which was not available as on the due date of filing return .....

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; 2.23 crores on account of cancellation of forward Forex contracts which was an abnormal item. 5.3 The Ld. AO/TPO/DRP has erred and acted contrary to the evidence and material on record in alleging that the Appellant's Forex losses were not abnormal as compared to the comparables and as such were not required to be adjusted. 6. GROUND NO. 6: The Ld. AO/TPO/DRP has erred in law and on facts and in circumstances of the case in rejecting the following companies as comparable companies: 6.1 IKF .....

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ial') 6.10 Inhouse Productions Ltd.('lnhouse Productions') 6.11 Sparsh BPO Service Ltd ('Sparsh BPO') 7. GROUND NO. 7: The learned AO/TPO/DRP have erred in law and on facts and in circumstances of the case in selecting following companies as comparables, which should not have been taken as comparable companies. 7.1 Acropetal Techologies Ltd. ('Acropetal') 7.2 Accentia Technologies Ltd. ('Accentia') 7.3 e-Clerx Services Ltd. ('eClerx') 8. GROUND NO. 8: .....

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eging that the Appellant had not demonstrated that working capital adjustment was essential in the facts of its case. 10. GROUND NO. 10: The learned AO/TPO/DRP have erred in law and on facts and in circumstances of the case in making upward adjustment exceeding the difference between total revenue earned by the AE from independent third party clients and revenue booked by the appellant from AE. 11. GROUND NO. 11: The learned AO/TPO/DRP have erred in law and on facts and in circumstances of the c .....

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the body of his assessment order. 13. GROUND NO. 13: The orders of the Ld. AO/TPO/DRP are vitiated by errors in law and fact and on account of ignoring and thereby being contrary to the material and evidence on record and on account of internal contradiction and inconsistencies. 3. The Department in its appeal has raised the following grounds: 1.Whether on the facts and circumstances of the case, did the DRP err in directing the TPO to re-compute the adjustment on account of arm's length pr .....

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he Act." 3. "Whether on the facts and circumstances of the case, did the DRP err in directing the TPO to allocate administrative expenses and depreciation while computing the operative margin in respect of Acropetal Technologies included as comparable without appreciating the fact that the same was included accordingly as per the provisions of the Act." 4. "The appellant prays that the order of DRP on the above grounds be set aside and that of the Assessing Officer be restore .....

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vices to its AE. Further, ITES services provided by the assessee mainly includes document review services (i.e. identifying the documents into responsive or non-responsive document based on the procedure manual provided by the client), abstraction services (i.e. punching the data from the contracts in predefined format like Excel or client provided template), drafting services (i.e. feeding of key contract data into contract template provided by the client) etc. In other words, the assessee comp .....

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(Rs. in lac) Operating Revenue (A) 3,324.40 Operating Cost (B) 2,890.78 Operating Profit (C=B-A) 433.62 Net Cost Plus % (C/B *100) 15.00% In its TP Study Report, the assessee had selected following five comparables: Name of company OP/Cost % i. Aditya Birla Mincas Worldwide Limited 21.43 ii. Allsec Technoligies Limited -16.44 iii. Sundaram Business Services Limited 2.54 iv. R Systems International Limited 16.91 v. Cross domain Solutions Private Limited 26.92 Arithmetic Mean 10.27 After claiming .....

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.22 Operating Profit (C=B-A) 92.18 Net Cost Plus % (C/B*100) 2.85% Thereafter, he rejected three of assessee s comparable companies, viz., i) Allsec Technologies Ltd., on the ground that it is consistently a loss making company; ii) Sundaram Business Services Ltd., on the ground of RPT Filter being less than 25%; and iii) R. Systems International Ltd., on the ground that the financial data is up to December, 2008. TPO then proceeded to carry out his own fresh search from comparables operating in .....

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68 vi. e-Clerx Services Limited 46.98 vii. Informed Technologies India Ltd. 23.13 Assessee s Comparables viii. Aditya Birla Mincas Worldwide Ltd. 1.85 ix. Crossdomain Solutions Pvt. Ltd. 26.92 Arithmetical Mean 29.57% Accordingly, an adjustment of ₹ 8,63,59,000/- was made on international transaction of ITS which was shown by the assessee at ₹ 33,24,40,607/-. 6. From the stage of the DRP two of the comparable companies viz., Metro Land Ltd. and Omega Healthcare Management Services Pv .....

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rtaining to treatment of Forex loss and whether any adjustment on account of Forex loss can be made vis-a-vis the comparables. This issue has been raised by the assessee in ground no. 5.1 to 5.3. As stated earlier, the assessee has been set up as a STPI unit which is providing ITE services to its AE and is captive service provider. Before us the Ld. Counsel for the assessee, Mr. Rajan Vora submitted that the assessee had entered into a Service Agreement dated 30.06.2006 for rendering back office .....

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ontract: 6,96,633 Others: (1,22,986) Total 3,41,44,774 Mr. Vora further pointed out that, under clause 3 of the service agreement , the compensation for services to the assessee includes for all services from its AE on actual total cost plus mark up of 15%. Since the AE had given advance towards compensation for services to be rendered, it was agreed and accepted that Forex loss is not an actual cost which is incurred for providing service to AE, hence the Assessee is not supposed to recover the .....

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g profit margin at 15% considering foreign exchange loss of ₹ 3.41 as non-operating in nature as the same has been considered to be abnormal. He submitted that the TPO has erroneously re-determined the operating profit margin of the assessee at 2.85% by considering the Forex loss as operating expenses on the ground that since it is a regular occurrence in a business and therefore, should form part of the total operating cost. 8. Mr. Vora, as an alternative argument submitted that, at least .....

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horities below the assessee had provided the data pertaining to the movement in the exchange rates of INR vs. US $ during the FY 2008-09. It was specifically pointed out that in this financial year the fluctuation in the foreign exchange rate was 27.47% as compared to forex fluctuation of US $ of 2.87% in the preceding three financial years. He also pointed out to various factors nationally and internationally which had affected the sharp decline of Indian rupee vis-à-vis the US dollars d .....

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counting policy in the past which was that, the assessee recognized marked to marked loss and gains if any, were not recognized till settlement. There was change in said accounting policy pursuant to the ICAI announcement on 29.03.2008 which was adopted by the assessee during the year under consideration. In the preceding year the accounting policy followed as per ICAI guideline was as such that profit or loss arising on settlement of forward contracts was recognized as income or expenses for th .....

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ed its cost base and also the margin and hence, such a loss on account of cancellation of forward contract should be treated as non-operating in nature. In support he relied on following decisions: i) HOV Services Ltd. Vs. JCIT (OSD), ITA No. 1969/PN/2013 dated 04.08.2016; ii) DCIT Vs. Federal Mogul Automotive Products (I) Pvt. Ltd., ITA No. 5769/Del/2011 dated. 25.03.2015; iii) SAP Labs India Pvt. Ltd. 44 SOT 156 (Bang) iv) Mylan Laboratories Ltd. Vs. ACIT, ITA lNo. 66/Hyd/2013 dated 10.01.2014 .....

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arables it is in the range of 0.52% to 7.27%, (if the case of Aditya Birla is removed which had an abnormal rate of forex loss of 27.04%), the arithmetic mean of forex loss/total cost of all the comparables would come to 2.7%, which is almost four times the cost of assessee, i.e., 11.79%. By way of a chart he demonstrated before us, if the adjustment is to be made by taking the total forex loss of comparables which is 2.71%, then the Forex loss which can be treated to be operating in nature woul .....

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pricing adjustment both for comparable companies as well as the tested parties, he relied on the following two judicial precedence of Delhi ITAT: (i) Schneider Electric India Pvt. Ltd. Vs. DCIT (ITA No. 937/DEL/2014) dated 29 September 2016:- wherein the Hon'ble Delhi Tribunal has held that foreign currency fluctuations need to be taken into account for TP adjustment both for comparable companies as well as tested party. The Delhi Tribunal also observed that effect of adverse foreign exchan .....

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a thus concluded that; firstly, either the Forex loss upto 2.7% of the assessee s cost i.e. ₹ 78.34 lakhs may be treated as operating in nature and balance ₹ 2.63 crores out of ₹ 3.41 crores should be treated as non-operating in nature, which will make the operating margin at 11.97%; or secondly, the cancellation of forward contract which is at abnormal feature in this year vis-à-vis the comparables, the same should be treated as non-operating in nature and if the sum of .....

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pointed out that, subclause (i) of Rule 10B(1)(e) provides that the net profit margin realized by the assessee from the international transaction entered into with the AE should be computed in relation to costs incurred or sales effected. For the purpose of determining the profit realized on the international transaction, all operating costs incurred for the purpose of providing the services to the AE have to be taken into account. Therefore, no question arises whether the foreign exchange gain .....

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currency, then such gain or loss is part and parcel of the relevant transaction and there is no basis to artificially segregate the loss or gain from the main transaction and give a different treatment. In support, she had relied on the following decisions: a) SAP Labs India Pvt. Ltd. -(2011) 44 SOT 156 (Bang.); b) Cisco Systems (India) Pvt. Ltd. - 50 taxmann.com 280 (Bang.); c) Rusabh Diamonds - 34 taxmann.com 160 (Mumbai ITAT); d) Westfalia Separator India Pvt. Ltd. 52 taxmann.com 381 (Delhi .....

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was specifically considered and the Tribunal held that hedging profits are in the nature of operating income only. 11. On the issue whether PLI of the assessee/tested party can be adjusted so as to increase the profit earned from the international transaction by excluding any part of the operating cost is abnormal or not, she submitted that it is not permissible to make any comparable adjustment in the PLI of the tested party and adjustment if required to be made, can be only made in the case o .....

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made in case of comparable uncontrolled transaction; therefore, there is no warrant to adjust the profit margin of the assessee to take into account the differences. Under TNMM, the net profit margin earned from international transaction is determined and once an item of expenditure is concluded to be operating income, then the same has to be taken into account for arriving at the net profit margin. Whence the Forex loss is reckoned as operating cost and is taken into account for determining the .....

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of the ITAT, Delhi Bench:- (i) Honda Motor Cycle & Scooters India Pvt. Ltd. (2015) 56 taxmann.com 237 (Del. Trib.); (ii) JCB India Ltd. (2015) 59 taxmann.com 211 (Del. Trib.) 12. Coming to the issue, whether the loss or gain from hedging transaction can be given a separate treatment from the loss or gain of the same underlined transactions, she submitted that the contention of the assessee that loss on account of cancellation of forward contract amounting to ₹ 2.22 crores is abnormal a .....

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parability issues. First, it needs to be considered whether the foreign exchange gains and losses are of a trading nature (e.g. exchange gain or loss on a trade receivable or payable) and whether or not the tested party is responsible for them. Second, any hedging of the foreign currency exposure on the underlying trade receivable or payable also needs to be considered and treated in the same way in determining the net profit. In effect, if a transactional net margin is applied to a transaction .....

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s or gain which is likely to arise on the realization of receivable or payable. If foreign exchange is likely to be received on realization of debtor at a future date, the hedging is done to sell foreign currency at the future date and if in the future date when the foreign currency is actually received and loss or gain is earned on the same, the reverse of the same transaction is done under the forward contract and if there is a profit earned on underlined transaction then there could be a loss .....

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a comparability adjustment will still have to be made in the margin of the comparables (i.e., the margin of the comparables should be reduced), in view of the fact that the assessee has incurred significant loss on cancellation of forward contracts, she submitted that Rule 10B(2) and 10B(3) provides for various comparability factors and the adjustments which are to be made are for the differences materially affecting the price or cost. She further submitted that Rule 10B (2) contains various com .....

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imilar in the international transaction and the uncontrolled transaction. Thus, risk is one of the important comparability factors. Risk on account of foreign exchange fluctuation arises when a transaction is entered into with another party resulting in contractual obligations being denominated in a foreign currency as compared to the currency in which the accounts are maintained. In such an event, any difference in the rate of exchange between the rate prevailing on the date of entering into co .....

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ale proceeds in foreign currency, the risk assumed by the assessee and the comparables have to be established to be similar. Having so established, there is no further requirement to ensure that actual loss or gain earned by the comparable should be matching with the actual loss or gain earned by the assessee. Therefore, she submitted that, once the comparables are also providing services and earning their receipts in foreign currency then there is no difference between the international transac .....

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the risk borne by the assessee and not by the comparables. She contended that if the argument of the assessee s counsel is to be accepted then every item of expenditure or income forming part of the assessee s operating cost will have to be matched individually with the comparables and this is not the requirement under Rule 10B(2) read with Rule 10B(3). Once all the comparables are found to be earning in foreign exchange currency then they will also have the same risk of having foreign exchange .....

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h mark up of 15%. The forex loss pertains to the transaction of provision of services by the assessee to the AE and, therefore, it has to be concluded that the forex loss incurred in this case for the purpose of providing services to the AE is as per the contractual arrangement, the same is required to be compensated by the AE and hence, it is to be recovered from the AE by the assessee. She also referred to a judgment of Hon ble Delhi High Court in the case of Morabeni India Pvt. Ltd. Vs. CIT ( .....

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egard, reliance placed on Honda Trading Corp. India Pvt. Ltd. Vs. ACIT; and SAP Labs India (P) Ltd vs. ACIT (supra) was reiterated. Further reliance was placed on the decision of CISCO Systems (India) Pvt. Ltd. vs. DCIT (66 SOT 82) (Bangalore) dated 14 August, 2014, wherein the Hon'ble Tribunal has distinguished the Forex loss between capital and revenue in nature and has categorically held that only the Forex gains arising on account of rendering of software development services is to be co .....

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a huge loss was a peculiar phenomenon for the year under consideration in the assessee s case, because such abnormal event and abnormal loss has neither arisen to the assessee in the past or in subsequent years nor in case of comparable companies. Thus, it was submitted by him that forex loss though arising in the normal course of business is a non-recurring and extraordinary item qua the year under consideration and qua the comparables. Hence, the same should not be considered while determinin .....

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DCIT (ITA No. 1412/PN/11) (Pune), dated 23 July 2012; (v) ACIT vs Fiat India Private Limited (ITA No.1848/Mum/2009) (Mum) dated 30 April 2010; (vi) Transwitch India Private Limited Vs. DCIT ( ITA No. 6083 / Del/ 2010) (Delhi) dated 30 March 2012; (vii) Global Vantedge (P) Ltd. vs DCIT (2010 37 SOT 1) (Delhi) 17. Without prejudice, Mr. Vora submitted that assuming if the adjustment is to be made on the margins of the comparables, then in majority of the comparables (i.e., 10 comparables) it was .....

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the facts of the present case, it will not make substantial difference whether forex loss adjustment if made on the PLI of the tested party or on the comparable companies. A separate working on approximate basis in the cases of the comparables where forex gain/loss details were available (out of set of 18 comparables 9 comparables) was given before us to demonstrate that the arithmetic mean of the comparables would then come down to 4.28% and after working capital adjustment is given then it wou .....

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ed that the cancellation of forward contracts was extraordinary and peculiar to the facts of the assessee s case. On the issue of whether the PLI of the tested party (assessee) can be adjusted so as to increase the profit earned from the international transaction by excluding any part of the operating cost as normal, ld. counsel submitted that in the case of the assessee, forward contract was entered to minimize the risk on account of exchange rate fluctuation, however, the exchange rate became .....

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od of strike and on the basis of ad-hoc calculation adjustment in the operating margin was made. Similarly, in the case of JCB India Ltd., the assessee had reduced the operating expenses on ad-hoc basis to account for the excessive operating cost incurred in the first year of operation. As compared to these cases, in the case of the assessee, the forex loss arising on account of cancellation of Forward contract is part of forex loss as appearing in financial statement, the break-up of which was .....

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'ble Delhi High Court in the case of Morabeni India Pvt. Ltd., supra as relied on by the Ld. DR was also distinguished by him. 18. We have heard rival submissions and considered the entire gamut of facts with reference to material referred to before us. The core issues before us are, firstly, whether the Forex loss or gain is operating cost or non-operating in nature; secondly, if yes, then, whether the PLI of the assessee (i.e., the tested party) can be adjusted so as to increase the profit .....

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e 3,324.40 Operating Cost Personnel expenses 1806.48 Operating & Other Expenses 825.18 Bank charges 0.35 Depreciation 258.77 Total Operating Cost 2890.78 Operating Profit 433.62 Add: Non-operating income Other Income 1l.61 Less: Non-operating Expenses 341.44 Exchange Difference 4.28 Loss on sold / scrapped fixed assets 0.14 Finance Expenses 345.86 Total Non-operating Expenses 99.36 Net Profit before Tax (OP/OC) 15.00% From the above calculation, the assessee has excluded foreign exchange los .....

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instatement of balances: 10,89,549 Open Contract: 6,96,633 Others: (1,22,986) Total 3,41,44,774 The assessee has adopted TNMM as the most appropriate method to determine the ALP of its international transaction of provision of legal process outsourcing services to the AE. 19. The relevant methodology of TNMM as contained in Rule 10 B (1)(e) for sake of ready reference is reproduced hereunder:- 10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to .....

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incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, bet .....

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account to arrive at an arm s length price in relation to the international transaction [for the specified domestic transaction]. Under the TNMM the focus is on transaction rather than business or the operating income of the company. The aforesaid rule refers to the net profit margin realized by an enterprise from an international transaction but not operational margin of enterprise as a whole. Here, the analysis is done only of the profits of the AE that are attributable to a particular contro .....

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angible asset owned by the enterprise having economic value of its owner or source of wealth/income). Thus; Sub-clause (i) envisages that the net profit margin is to be computed on any one of the base as above. Sub-clause (ii) envisages that comparability analysis of the net profit margin realized by the enterprise is to be done from a comparable uncontrolled transaction by an unrelated enterprise which is to be computed having regard to the same base, that is, the base adopted for determining t .....

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ng into account the differences, if any, either between the international transaction and the comparable uncontrolled transactions, (in other words, difference is to be adjusted in the net profit margins of the comparables); or between the enterprises entering into such transaction (that is, related party) which could materially affect the amount of net profit margin in the open market. Thus, sub-clause (iii) envisages that the adjustment on account of difference which could materially affect th .....

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gible assets, therefore, the determination of ALP is based on the amount of operating profits of that party to the controlled transaction. Such least complex party is referred to as tested party . Such a tested party is reckoned to be an enterprise who is the participant in the controlled transaction and whose operating profit is attributable to the controlled transactions which is verified using the reliable data of incomparable transactions of independent party so that very few or reliable adj .....

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transaction if - (i) none of the differences, if any, between the transaction being compared, or between the enterprises entering into such transaction are likely to materially affect the price or cost shared or paid in, or the profit arising from, such transaction in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. 21. From the harmonious reading of sub-clause (iii) of clause (e) of Rule 10B and sub-rule (3) of 10B, it i .....

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sted party whose transactions is being compared. This is apparently clear from the reading of sub clause (i) and (ii) which envisages that the net profit margin is to be computed and compared to in relation to or having regard to the same base, that is, of the tested party or the comparables; and sub-rule (iii) provides that adjustment of net profit margin arising in comparable uncontrolled transaction, i.e., vis-à-vis the independent comparables is adjusted taking into account the differ .....

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rty or the enterprise entering into controlled international transaction is to be established at the same net profit margin which is determined under sub-clause (iii), that is, under the comparability analysis. Lastly, sub-clause (v) provides that the net profit arrived should be at ALP. 22. In view of our understanding and analysis of Rule 10B as above, we are unable to appreciate the contention raised by the Ld. CIT DR that any adjustment if required to weed out the difference materially affec .....

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nalysis improper/impractical and so is the adjustments. The entire substratum of transfer pricing and determination of ALP is, thorough comparability analysis of controlled transactions with the comparable uncontrolled transactions which is needed to ensure that any adjustment if required to be made should achieve the results that would be realized by an independent enterprise in comparable circumstances. Without adequate comparability analysis, the third party data which is used to find out the .....

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can be made either on the cost base or profit of the tested party then there may arise a problem, that in case of the comparables such factors materially affecting the cost or profit may not be accurately available so that proper adjustment can be made in respect of all the comparables. Here in this case, it has been pointed out that in case of as many as ten comparables it was not possible to identify the correct amount of forex loss/gain from the financials/data available in the public domain. .....

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argin, all operating expenses should be taken into account and once any item is appearing as an operating cost which is taken into determining the PLI, then there cannot be any reason to exclude any part of the cost subsequently in the garb of making comparability adjustment; and while determining the PLI of the tested party the only information which is required to be seen is, whether the item of expenditure is operating or nonoperating. We are unable to fully subscribe to such proposition beca .....

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nkering of PLI in the exercise of determination of arms length price. If any peculiar abnormality or extraordinary event which has arisen specific in the case of the tested party then same needs to be analysed, firstly, by comparing it with uncontrolled transactions with independent entity; and secondly, if such peculiarity is not found in the case of the uncontrolled comparable transactions then the rule envisages that reasonable accurate adjustment should be made which materially affects the c .....

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rwise also when international transactions are entered into with the AE, one of whom is resident of other contracting state and the transactions are in foreign currency, then any gain or loss on account of forex is inherent item of cost or profit. To this extent the Ld. Counsel before us has also not made much dispute, though this issue was vehemently raised by the assessee before revenue authorities and also in the ground raised before us. Thus, the proposition of the assessee that forex loss i .....

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₹ 2.22 cr. is due to abnormal factors peculiar to the case of the assessee in this financial year and, therefore, should be excluded from the operating cost while computing the PLI. In principle, we agree with the contention of the Ld. CIT, DR that hedging loss or gain arising in the normal course of business has to be generally given the same treatment as is given to the loss or gain in the underlined transactions. It is imperative to see, firstly, whether the forex gain or loss are of tr .....

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he tested party. This is the explanation given by the OECD as referred to by the Ld. CIT, DR. In all such cases, if forex is directly to be received on realization of debtors at a future date, hedging is done to sell or buy foreign currency at the future date. In the case of the assessee, it has been explained that the assessee had entered into forward contracts to minimize the risk on account of exchange rate fluctuation. So far as entering into forward contracts to minimize such risks is absol .....

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it in the relevant financial year, which is not across the industry or is either absent or is of less magnitude in the case of comparable independent parties, then definitely such an abnormality or extraordinary event has to be factored in while computing the cost base or PLI. Before us, the assessee has demonstrated that in this particular financial year there was an extraordinary fluctuation in the Forex rate which was at 27.47% as compared to the average fluctuation of 2.87% in the earlier th .....

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, the assessee cancelled the forward contract so that loss can be mitigated and accordingly, in that process assessee had suffered a loss of ₹ 2.22 cr. Such a loss even due to untoward incident generally would have gone into the operating cost, had it been demonstrated that it was the phenomenon across the industry or in the cases of comparable uncontrolled transactions, that is, independent comparable entities this was also the peculiar feature. If such a peculiarity is absent or its magn .....

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ined in Rule 10B (2) also envisages risks assumed by the respective parties to the transactions and risk on account of forex fluctuation arises when a transaction is entered into with another party resulting in contractual obligations being denominated in foreign currency as compared to the currency in which accounts are maintained. In such an event, any difference in the rate of exchange between the rate prevailing on the date of entering into the contract and the date of realization will resul .....

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uncontrolled transaction, that is, in the case of the other comparables. Risk assumed by the assessee as well as by the comparable entity may be similar but quantum and scale of a risk factor if undermines the computation of PLI of the assessee vis-à-vis the comparables, then our rules under the Indian Transfer Pricing provisions also enshrines that any material difference affecting the cost or profitability between the international transaction and comparable uncontrolled transaction ne .....

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n, the loss amounting to ₹ 2,22,52,786/- on account of cancellation of forward contracts out of total forex loss of ₹ 3,41,44,774/- needs to be eliminated from the operating cost and this adjustment is proposed to be made in the case of the assessee which is the tested party. We accordingly direct the TPO/AO to make the adjustment of this amount in the operating cost and rework the PLI. 26. In view of our this finding, we do not feel necessary to go into the other arguments of the Ld .....

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th the parties have also referred to various decisions in support of their contentions that how the adjustment should be made either in the case of the tested party or in the case of the comparable independent parties. Both the parties have cited their own set of decisions and have also tried to distinguish the contrary decisions relied by the opposing parties. Since we have analysed the issue as per our understanding of relevant provisions of the rules and also its application on the facts of t .....

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er that the Ld. TPO has rejected most of the comparables shortlisted by the assessee and has also introduced his own set of comparables. During the course of the transfer pricing proceedings, the assessee gave a list of certain more comparables for bench marking the assessee s margin, which has been by and large rejected by the TPO. In all, out of the total set of 24 comparables which were subject matter of acceptance and rejection both by the revenue as well as by the assessee, some ten compara .....

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icroland Limited - 19.51 Reinstated by DRP Accepted by assessee. x. Omega Healthcare Management 15.43 Reinstated by DRP & Services Pvt. Ltd. accepted by assessee. As per the assessee s FAR analysis contained in TP study report, the various functions performed by the assessee have been described in the following manner:- ITES, data processing, legal database and other administrative support services P3 LDS The functions performed by P3 LDS with resp3ect to rendering ITES in the nature of lega .....

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apping studies, freedom to use studies, patent illustrations and conducting patent related studies. b. Contract Drafting & Management Services: P3 LDS provides a commercial contracting and licensing services, including drafting, reviewing and revising contracts. It also provides contract management and administration services. These services are further integrated with customized online contract managed databases. P3 LDS also provides legal terms database solutions. c. Document Review & .....

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ing federal, state, international case law, federal, state and municipal regulatory codes and legislative history using industry-standard databases; and also conducts multi-jurisdictional surveys i.e., 50 states survey. e. Marketing/Business Development: P3 LDS does not carry out marketing functions, since it is a captive entity and secures business by way of outsourcing from its parent company, P3 LLC. f. Finance: P3 LDS makes arrangements for the funds required for meeting working capital and .....

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ct to withholding tax, services tax and any other taxes, duties or levies as applicable in US and in India. 29. Both the parties have made very elaborate submissions on all the ten comparables which we shall be discussed in brief hereinafter:- (i) Acropetal Technologies Ltd.:- 29.1 The TPO has considered the Engineering Design service segment of Acropetal as similar to ITES service and has considered the operating margin of Engineering Design Service segment for comparison purpose. The DRP has a .....

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in this year which makes its results incomparable. From the Annual Report of the said company, he pointed out that this company has entered into the business of exporting software services and hence, 100% of its revenue comprises of export earnings. Referring to the business description as available in the public domain, he pointed out that engineering design services of this company has a portfolio of services like concept design, product design and development, advanced analysis, reliability e .....

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/2014 AY 2009-10 dated 18 February 2015 ; c) Excellence Data Research Pvt. Ltd v ITO (ITA No. 159/Hyd/20 14) AY 2009-10 dated 12 December 2014; d) M/s. Capital IQ Information Systems (India) Pvt. Ltd.[ITA No. 1961/Hyd/2011] AY 2009-10; e) Daksh Business Process Services Pvt. Ltd [ITA No. 2666/Del/2014], AY 2009-10, dated 5 July 2016; f) QAD India Pvt. Ltd [ITA no. 1685/Mum/2013], AY 2009- 10, dated 30 September 2016; g) Market Tools Research Pvt. Ltd. [ITA No.1811/Hyd/2012], AY 2008-09, dated 24 .....

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d, we find that assessee is mostly into ITES relating to data processing of legal data base and other administrative support services. It has not been disputed that under the segment of Engineering Design Services , this company is providing broad spectrum of services which is mainly in the nature of software development. Its entire Engineering Design Services is providing software services to its client and has portfolio of services which included concept design, product design and development .....

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ited by Ld. Counsel this company has been held to be incomparable with the company rendering purely ITES services. Thus, we agree with the contention of the Ld. Counsel that Acropetal Technologies Ltd. should be excluded from the list of the comparables. (iii) Accentia Technologies Ltd.:- 29.5. During the course of the transfer pricing proceedings, the Ld. TPO based on his fresh bench marking exercise had selected this company. Before us, Ld. Counsel submitted that this company is into high end .....

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he turnover of this company. Thus, this company cannot be held to be a good comparable. In support, heavy reliance was placed on the decision of Maersk Global Service Centre India Pvt. Ltd., ITA No. 2594/Mum/ 2014 for AY 2009-10 order dated 16.01.2015. That apart reliance was also placed on the following decisions:- a. Jardine Lloyd Thompson India P Ltd (ITA No. 779/Mum/2013) (Mumbai) dated 29 November 2016; b. Xchanging Technology Services India Pvt. Ltd (ITA 813/2015) (Delhi High Court) dated .....

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July 2014; h. Hyundai Motors India [ITA No. 255/Hyd/2014, AY 2009- 10, dated 31 July 2014; i. M/s. Avineon India Pvt Ltd. [ITA No. 1989/Hyd/2011], AY 2007-08, dated 31 October 2013; 29.6 The Ld. CIT, DR objecting to the exclusion of this company submitted that the assessee is not low end BPO service provider albeit assessee is into high end service which is in the nature of legal process outsourcing. Assessee s service agreement describes the scope of service at clause 3 of the said agreement, .....

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nclude: • receipt of the Project, review and acceptance of Project Instructions, • application of relevant Client Date and Client Resources; and • creation and delivery of Project Deliverables This Agreement shall apply to all Services performed by PLDS and to all Project Deliverables supplied by the PLDS from the date hereof, whether or not an SOW specifically covers the services or Project Deliverables requested. Apart from that the assessee had used professional lawyers to prov .....

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ovide services are not comparable to the low end service provided by a voice based call centre. Thus, Accentia Technologies Ltd. is comparable to the assessee as both the assessee as well as the Accentia is providing services by using highly skilled manpower. Regarding extraordinary event of merger, she submitted that same has not impacted the profitability of the said company and as a matter of fact, the operating profit margin to cost ratio was 40% for the year ending 31.03.2008 and the same w .....

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ering ITES, skilled and professional Lawyers were engaged by the assessee company and that precludes the assessee being classified as low end service provider. As pointed out by her, in the T. P. Study Report as stated, the assessee is providing the services mostly through its own staff which are qualified lawyers in Mumbai and has also outsourced its ITES services which is in the nature of legal support services, data processing and legal data services by engaging qualified lawyers from outside .....

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ut the comparability analysis and its impact on sales/profit margin. Under such exceptional events of merger and acquisition, the accounts and the trading results does not reflect normal margin which are earned in the normal course of the business in a comparable uncontrolled scenario, because M & As generally have huge impact on the trading results and distort the profit margin. This factor mostly vitiates the comparability analysis at least qua the year in which such M & As are underta .....

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aken for comparability analysis. Thus, this comparable is remitted back to the TPO for proper analysis in light of aforesaid observation. (iii) eClerx Services Ltd.:- 29.8 During the course of the fresh benchmarking exercise carried out by the ld. TPO, this comparable was selected by him. On this, the Ld. Counsel before us submitted that firstly, this company is functionally not comparable to the assessee as this company has reported exceptional performance during the year under consideration as .....

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2016 ii) Copal Research India Pvt Ltd (ITA 894/2015)(Delhi High Court) dated 23 November 2015 iii) Nett App India Pvt. Ltd [IT(TP) A No. 1633/Bang/2014], AY 2009-10, dated 11 May 2016 iv) Daksh Business Process Services Pvt. Ltd [ITA No. 2666/DeI/2014], AY 2009-10, dated 5 July 2016 v) HSBC Electronic Data Processing India Pvt. Limited (ITA No. 247 & 295/Hyd/2014 AY 2009-10 dated 18 February 2015 vi) Maersk Global Service Centre India Pvt. Ltd. (ITA No. 2594/Mum/2014 AY 2009-10 dated 16 Janu .....

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millions) Outsourcing charges (Contract for services) 266.59 843.09 Total direct cost (outsourcing charges + employee benefit expenses) 31.59% Rate of outsourcing charges to total direct cost Further Ld. Counsel relied upon the decision of Hon'ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd., (supra), wherein the Hon'ble High Court has directed the Assessing Officer to exclude one of the comparables on the ground that most of its work was outsourced to other service pro .....

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finding given in the impugned orders, we agree with the contention of the Ld. CIT, DR that assessee company cannot be regarded as low end ITES service provider because engagement of qualified and professional lawyers for providing legal outsourcing services is definitely high end services. We cannot reject this comparable simply on the ground that the comparable company is providing high end KPO services, because as held in the foregoing paragraph the assessee too is into providing high end lega .....

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there is no data regarding the assessee as to how much the assessee is outsourcing its activities or whether all its activities are in house. Therefore, we remit this issue to the file of the TPO/AO to examine the outsourcing activity of this comparable and analyse vis-à-vis the assessee. If TPO founds that there is a major difference in the outsourcing activity in the case of eClerx as compared to assessee s outsourcing activity whether negligible or there is no outsourcing at all, then .....

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assessee had also submitted the copy of Annual Report of the company as at 31.12.2009 and results as on 31st March 2009 also. The TPO has rejected this comparable on the ground that it has reported financials for the year ending 31.12.2008, whereas the period for comparability analysis is 31.03.2009. Before us, the Ld. Counsel submitted that as per the supplementary details available, R-Systems is engaged in BPO/ITES business and it is undisputed fact that it is functionally comparable to the as .....

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B C D = (A+B+C) Revenue 2,606 566 576 2,616 Cost (Revenue (-) PBIT) 2,229 520 466 2,175 Unallocable expense (Refer note-1) 105 49 18 74 Total cost 2,334 569 484 2,249 Operating profit 272 (3) 92 367 OP/OC 11.65% 0.53% 19.06% 16.33% Note-1: Unallocable expenses calculated on the basis of proportion of revenue from BPO segment to total revenue. Thus, it was pointed out that from the aforesaid figures which are from the audited accounts, it can be seen that operating margin of RSystems for the yea .....

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No. 9661De1/2014] AY 2009-10 dated 6 June 2014; Mercer Consulting India Pvt. Limited [ITA No. 101 of 2015 (O&M)] (Punjab & Haryana High Court) AY 2009-10 dated 24 August 2016 ; M/s. CISCO Systems India Private Limited [ITA No. 271/Bang/2014, AY 2009-10], dated 30 July 2014; Aegis Limited [ITA No. 1213/Mum/2014], AY 2009-10, dated 27 July 2015. 29.12. On the other hand, the Ld. CIT, DR has placed reliance on the decision of Hon'ble Bombay High Court in the case of PTC Software India .....

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amp;H High Court in the case of CIT Vs. M/s. Mercer Consulting India Pvt. Ltd., ITA No. 101 of 2015 dated 24.08.2016 had dealt the issue in connection with R-Systems International Ltd. only. 29.13. We have heard rival submissions and also perused the relevant finding given in the impugned orders. This comparable company has been rejected not on the ground of functionality but on the ground that it is following the financial year from January to December (i.e., calendar year). Though a comparable .....

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d transaction with controlled transaction. If the financials of the corresponding period is available then it cannot be rejected simply on the ground that it has a different financial year. As brought out on record by the Ld. Counsel before us that the audited accounts of R-Systems for the year ending 31.12.2008 and for the quarter starting from 31.01.2008 to 31.03.2009 is available and once such an audited statement is available, then the proportionate working for 31.03 2009 can easily be deduc .....

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rvation which reads as under: 27. The TPO excluded the case of R-Systems International Limited from the list of comparables. The ITAT included the same. The Transfer Pricing Officer excluded the case of R-Systems International Limited on the ground that it follows the calendar year i.e. 1st January to 31st December for maintaining its annual account whereas the accounting year of the assessee is 1st April to 31st March. The Transfer Pricing Officer followed an order passed by the Mumbai Bench of .....

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ifference. If it is possible to determine the value of the transactions during the corresponding period, the purpose of comparables would be served. The question in each case is whether despite the financial years of the assessee and of the other enterprise being different, the financials of the corresponding period of each of them are available. If they are, the Transfer Pricing Officer must refer to the corresponding period of both the entities in determining whether the two are comparable or .....

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cluded, it is possible to obtain the data for the financial year 01.04.2008 to 31.03.2009. 30. This view is not contrary to Rule 10(B)(4) which reads as under:- "10B(4) The data to be used in analysing the comparability of an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. 31. The Rule does not exclude from consideration the data of an entity merely because its financial year is different from the finan .....

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tems International Limited is available. 32. We are, therefore, entirely in agreement with the decision of the Tribunal that if the data relating to the financial year in which the international transaction has been entered into is directly available from the annual accounts of that comparable, the same cannot be held as not passing the test of sub-rule (4) of Rule 108. 29.14. So far as the decision of Hon'ble Bombay High Court as relied upon by Ld. CIT DR is concerned, in that case the reve .....

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e proportionate working of two consecutive calendars years in which the said quarter results fell, like in the present case. Here in this case, once the audited data is available for the quarter 01.01.2009 to 31.03.2009 then same is liable to be accepted. Accordingly, we hold that this company is to be accepted as comparable company for the purpose of benchmarking the assessee s margin. (v) Allsec Technoligies Ltd.:- 29.15 This comparable company has been rejected by the TPO on the ground that i .....

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rn in the international market which has affected the entire industry. Further, this company had reduced its losses by 46% in this year as compared to the earlier years. 29.16. On the other hand, the Ld. CIT, DR in her written write up has submitted as under: Allsecc Technologies Ltd. - This comparable was rejected by the TPO for the reason that it was incurring losses, which indicated that there were certain abnormal factors operating in its case. The exclusion was upheld by the DRP whereas the .....

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, a call centre is in the nature of low end BPO service and is not comparable to high end services that require skilled manpower. Further, this company is also going through merger and acquisition during the relevant previous year. The same is evident from Pg 392-393 of the Paper Book. Further, the financial highlights of the company as appearing in its Balance Sheet for 2010-11 can be referred to Sr. No. V(l) of Revenue's Paper Book. It can be observed from the same that right from the year .....

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20.59% 23.21% 24.30% -10.38% -6.05% -4.85% -2.39% The fall of profits over a period of three years as compared to good margins in the year 2005, 2006 and 2007 (shows that the merger and acquisition undertaken by this company and significant expansion within India has impacted the profitability over a period of three years up to March 20 1l. Refer pages VI, V2 and V3 of Revenue's Paper Book. It is therefore submitted that Allsec Technologies has been correctly excluded by the TPO as it is ne .....

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. Tribunal) V-4 Para 23 iii) Schlumberger Global Support Centre Ltd. (2015) 64 taxmann.com 322 (Pune ITAT) V-5 Para 63,64 iv) Lason India Pvt. Ltd. (2016) 70 taxmann.com 259 (Chn. ITAT) V-6 Para 4.6.2 29.17. We have heard the rival submissions and also perused the relevant material placed on record. One of the arguments placed by the Ld. CIT DR is that, the foreign exchange earnings of this comparable during the year was 74% which has reduced to 50% in the subsequent year, therefore, it is below .....

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nd right from the year 2008 to 2011 this company has been incurring loss. The merger and acquisition undertaken by this company has impacted the profitability over a period of three years upto March, 2011. If the loss is on account of merger and acquisition in this year, then definitely we agree with the proposition of Ld. CIT, DR that this would definitely impact the PLI and consequently the comparability analysis. However, if the loss is during the normal course of business and has nothing to .....

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purpose. (vi). Microland Ltd. (subject matter of Department s appeal):- 29.18 This comparable was selected by the assessee which has been rejected by the TPO but reinstated by the DRP. Such an inclusion of this comparable has been challenged by the department in its appeal. The TPO rejected this company mainly on the ground that ITES activity is not its main activity and the said company is primarily engaged in infrastructure management function which generates 80% of its revenue. This company .....

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. Name of the Rulling Citation Revenue s paper book Reference Relevant para of judgment i) SA&P Capital IQ India Pvt. Ltd. (2016) 72 taxmann.com 326 (Hyd. ITAT) III-1 Para 28.2 ii) Interwoven Software Services (I) Pvt. Ltd. (2016) 74 taxmann.com 103 (Bang. ITAT) III-2 Para 26 29.19. On the other hand, Ld. Counsel submitted that TPO has rejected the Microland on the ground that it was not selected by the assessee in its TP Study Report and income from ITES business is less than 75% of the tot .....

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; and secondly, it has incurred loss during the year. The Ld. CIT, DR has also pointed out that the ITES segment was into loss in earlier year also. As regard the contention that the assessee has not selected the company in the T.P. Study Report, therefore, it is precluded from being considered as comparable by assessee at a later stage, we are unable to subscribe to the views of the TPO, because once the TPO has rejected most of the comparables and asked the assessee to furnish fresh comparable .....

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unless certain peculiar factors have not been pointed out for loss, a comparable company cannot be rejected simply on the ground that it is loss making company. Once a separate segment is available and the profitability of such a segment is determinable, then the same should be adopted for the comparability analysis. Hence, we uphold the order of the DRP for accepting the said comparable in the final list of comparables. Accordingly, the revenue s ground on this comparable is treated as dismiss .....

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bmissions of both the parties and on perusal of DRP s order, we do not find any reason to interfere on such a direction of the DRP, because if financials are available and profit margins are determinable along with functional profile, then the TPO should consider this comparable for comparability analysis. Accordingly, we direct that Omega Healthcare should be accepted subject to the availability of financial data. 29.30 Apart from the aforesaid comparables, the Ld. Counsel pointed out that ther .....

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engaged in providing ITES services and hence should be accepted for comparative analysis. The first two companies have been rejected by the TPO mainly on the ground that, these companies are not forming part of the TP s study report. The DRP too has rejected these comparables on the ground that, inclusion of such comparables would amount to cherry picking of the comparables. The assessee before the authorities below had submitted the relevant extracts of annual report of the companies to substa .....

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ability analysis. The TPO cannot preclude the assessee from proposing inclusion or exclusion of comparables even it has been brought at later stage either by assessee or by TPO himself, if all material facts for comparative analysis are made available. The paramount aim of transfer pricing mechanism is determination of ALP of a transaction and any inclusion or exclusion of comparables should be based on proper FAR analysis as provided under the law. Accordingly, we direct the TPO to examine thes .....

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ble only up to 31.03.2008. The assessee had submitted that the business description of this company is based on information available on website which shows that Assessee Company is into BPO/ITES services and assessee made available the financial data for 31st December 2008. Here, in this case also, if audited financials after 31st December 2008 are available and based on the data for next year the turnover as well as proportionate margin can be worked out, then we do not find any reason as to w .....

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hen other comparables need not be adjudicated upon and accordingly, we are confining our finding qua the comparables which has been argued before us; and we are refraining ourselves in deciding the other comparables as the parties have not argued other comparables before us. 31. Regarding working capital adjustment as urged in ground no. 9 by the assessee, if assessee has provided the comparative analysis vis-à-vis the comparables and the data, then in that case, we direct the TPO to exam .....

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