TMI Blog2016 (6) TMI 1180X X X X Extracts X X X X X X X X Extracts X X X X ..... ount of differences in the risk profile of the assessee with that of the comparable cannot be denied. Disallowance of benefit under section 10A - AO had reduced the lease line charges from export turnover, however rejected the similar treatment while computing total turnover - Held that:- The issue has been considered at length in favour of assessee in assessee’s own case for assessment year 2007-08, 2008-09 and 2009-10. After considering the rival submissions and pursuing the relevant material on record we find force in the contentions advanced by the ld.AR, requiring the exclusion of lease line charges from total turnover as well. - I.T.A. No.750/Del/2015 - - - Dated:- 27-6-2016 - SHRI PRAMOD KUMAR, ACCOUNTANT MEMBER AND SMT. BEENA A. PILLAI, JUDICIAL MEMBER For The Appellant : Shri G. C. Srivastava, Adv. For The Respondent : Shri Amrenda Kumar, CIT DR ORDER PER BEENA A. PILLAI, JM: The present appeal has been preferred by the assessee against the order passed by DCIT circle-4, Gurgaon on 29/12/2014 for assessment year 2010-11. 2. The assessee filed its return of income on 13/10/2010 declaring a total income of ₹ 2,54,66,749/-. The case wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices TNMM OP/OC 7,963,346 13.46 12.53 Provision of advisory services TNMM OP/OC 52,295,871 12.98 11.66 Reimbursement of expenses to AEs TNMM OP/OC 35,979,612 - - Reimbursement of expenses by AEs N.A. - 7,725,6198 NA NA 2.2 The segmental results furnished by the assessee are as under: Financial 2009-10: Particulars Software development and maintenance services Back office support services F A Support Services Strategic advisor services Total Income Service Income 378,141,457 103,089,512 7,963,346 51,295,671 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -5.58 Gold stone technologies Ltd. NA -10.30 19.35 8.06 Helios Matheson Information Technologies Ltd 12.61 NA 29.16 18.90 Indium Software (I) Ltd. NA -12.96 -3.45 -7.64 Infosys Tech. Ltd. 43.24 38.69 35.53 39.45 KPIT Cummins Info systems Ltd. NC 9.27 8.94 9.12 Larsen Tubro Infotech Ltd. 16.23 13/49 14.04 14.56 LGS Global Ltd. NA 13.75 22.36 17.29 Mindtree Ltd. 16.34 1.36 12.49 9.25 Persistent Systems Pvt. Ltd. 27.16 13.39 24.61 21.13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2008 Cepha Imaging Pvt . Ltd. NA -4.89% -1.92% -3.44% Cosmic Global Ltd. NA 47.61% 20.73% 34.71% R. Systems International Ltd. (Seg.) -3.41% 8.52% 6.70% 6.32% Arithmetic Mean 12.53% Advisory services S.N. Name of the company OP/OC(%) 1 Cyber Media Research Ltd. (Earlier IDC India Ltd.) 13.00 2 ICRA Management Consulting Services Ltd. 0.41 3 Indus Technical Consultant Limited 11.99 Average 8.47% 2.5 The ld.TPO rejected the comparables selected by the assessee by applying certain comparables a criteria such as turnover filter, there companie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 43.07 37.30 2 Cosmic Global Ltd. 18.28 17.40 3 e4e Healthcare 31.03 28.66 4 Fortune Infotech Ltd. 22.80 18.49 5 I-gate Global Ltd 24.54 21.20 6 Infosys BPO Ltd. 31.46 27.27 7 Jindal Intellicom Ltd. 13.62 12.05 8 Microland Ltd. -5.18 9 Omega Healhcare 11.84 10 TCSE-Serve International Ltd. 13.80 52.53 11 TCSE-Serve Ltd. 63.38 62.38 Average 28.56% 25.81% 2.6 This led to the proposal for a transfer pricing adju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has erred by not accepting the economic analysis undertaken by the assessee in accordance with the provisions of the Act read with the Income-tax Rules, 1962 ('the Rules'), and modifying the same for the determination of the Arm's Length Price (,ALP') of the impugned transactions to hold that the same are not at arm's length. Ground No.3 : The learned AO / TPO / DRP has erred, in law and on facts and circumstances of the case, by aggregating the transactions pertaining to 'provision of finance and accounting ( F A ) support services' with transaction pertaining to 'provision of back office support services'. Ground No.4 : (a) Not accepting the use of multiple year data, as adopted by the assessee in TP documentation; and (b) Determining the arm's length margins / prices using data pertaining only to financial Year ('FY') 2009-10 which was not available to the assessee at the time of complying with the Indian TP documentation requirements. Ground No.5 : The learned TPO / AO / DRP has erred, in law and on facts and circumstances of the case, in rejecting certain comparable companies selec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n terms of clause (iv) of Explanation 2 to section 10A of the Act, without making the similar adjustments from 'total turnover'. without prejudice, erred in facts and in law in making the reduction of expenditure in foreign currency on lease line charges from 'export turnover' without making the corresponding adjustment from 'total turnover' for the purpose of computing deduction under section 10A of the Act. Thus, not maintaining parity in the numerator and denominator i.e. to say, export turnover and total turnover respectively. Erred in law and in facts in not considering the order passed by the Hon ble ITAT for AY 2007-08 wherein the disallowance on similar ground has been deleted thereby violating the Doctrine of Binding Precedents. Ground No. 13: The learned AO has erred in levying consequential interest under section 234B of the Act. Ground No. 14: The learned AO has erred in initiating penalty proceedings under section 271 (1)( c) of the Act. The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time or at the time of hearing the appeal. The&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Back-office support and F A support segment 1. R Systems international Ltd 2. CG-VA K software and exports Ltd 3. informed technologies Ltd 4. Microgenetic systems Ltd 8.3. We shall take up these companies one by one to ascertain their compatibility or otherwise with the assessee. Before embarking upon this exercise it is sine qua non to precisely consider the functional profile of the assessee. Functional analysis of the assessee from the TP study: 9. From the TP study it is seen that assessee was providing software development and maintenance support service, back-office support services, financing and accounting services and advisory services to its AE since it s incorporation. Tendered the aforesaid services under the directions issued by Sun Life Ireland. Further it stopped rendering F and A support service and advisory services to its group entities during financial year 2009- 10. 9.1 From the TP study it is seen in respect of software support service segment, the assessee undertakes development of modules as well as parts of modules for software, being used by overseas group entities which included bug fixing, carrying out maintenance support s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the comparables under both the segments where the assessee contends for exclusion. Software development segment : E-Infochips Bangalore Ltd. 10.1. It has been submitted by the ld.AR that this comparable was selected by ld.TPO (page33- 35 of TPO order) even though assessee objected to the same. The assessee had objected that the company is functionally different and is having two different segments that there is IT and ITeS and that it has earned supernormal profits due to this similar nature of services. It was further contended that this company is engaged in hard designing, product re-engineering, product life cycle management enterprise IT consulting and IT enabled services. Ld.TPO did not accept the contentions of the assessee and retained this company as a comparable. It was further submitted that this company was not selected by TPO either in earlier year or in later years. The ld.AR submitted that segmental information was not available in respect of this comparable. The counsel has relied on the order passed by the TPO for assessment year 2009-10 10.2. Ld.DR, however, refer to the extracts made by the ld.TPO in the order to submit that E-Infochips Bangalore L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sole customer, Fujitsu services Ltd, and accordingly is exposed to significant single customer risk. The above company cannot be considered as comparable on functional basis. 10.9. As this company is functionally different from assessee and in absence of segmental information we direct the AO/TPO to exclude this company from the final list of comparables. Thirdware Solutions Ltd 10.10. This company was selected by ld.TPO (page 43- 44 of TPO order) even though assessee objected to the same. The assessee had objected that the company is functionally different as during the said year the company was engaged in providing software product development implementation and consulting based on ERP and business intelligences. 10.11. Ld.DR, however, refer to the extracts made by the ld.TPO in the order to submit that Thirdware Solutions Ltd is a comparable company with that of assessee. 10.12. After considering the rival contentions and pursuing the annual reports placed on record, we are of the opinion that this company cannot be selected as comparable for TP analysis. Here it is pertinent to mention that this company was considered by the ld.TPO as a comparable in the im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10.17. Ld.DR, however, referred to extracts from the ld.TPO s order to submit that Accentia Technologies Ltd. is comparable with assessee. The ld. DR relied upon order dated 27.04.2015 passed by Hon ble Delhi High Court in the case of Chris Capital Investment versus DCIT reported in I.T.A.No. No.417/2014, wherein Hon ble Delhi High Court has held that: the mere fact that an entity makes high / extremely high profits / losses does not ipso facto, lead to its exclusion from the list of comparables for the purpose of determination of ALP. In such circumstances enquiry under Rule 10B(3) ought to be carried out, to determine as to whether the material differences between the assessee and the said entity can be eliminated. Unless such differences cannot be eliminated, the entity should be included as a comparable. 10.18. After considering the rival submissions and pursuing the relevant material on record, we find that functionally, this company is into development of software products for healthcare. It is submitted by the ld.AR that Accentia Technologies Ltd is engaged into diversified activities such as Knowledge Process outsourcing(KPO), Legal process outsourcing(LPO), Data proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the reason being that the latter is giants in the area of development of software and it assumes all risks, leading to higher profit. On the other hand, the assessee is a captive unit of its parent company in the USA and it assumes only limited currency risk. Having considered these points, we are of the view that the case of aforesaid Infosys and the assessee are not comparable at all as seen from the financial data etc. of the two companies mentioned earlier in this order. Therefore, we are of the view that this case is required to be excluded. 10.23 Since there is no similarity in the functional profile of this company and assessee respectfully following the ratio laid down in Agnity India Technologies (supra), we direct the TPO/AO for removal of this company from the list of comparables. I Gate global solutions Ltd 10.24. The TPO included this company in the list of comparables despite the objections raised by the assessee. The assessee contended that this company offers both IT and ITES services and it has amalgamated with I Gate Global Solutions Sdn.Bhd., during the year under consideration. 10.25. Ld.DR, however, referred to the extracts made by the ld.T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, refer to the extracts made by the ld.TPO in the order to submit that TCS E Serve International Ltd. is comparable with assessee. The ld.DR relied upon the extract of the decision of Hon ble Delhi High Court in the case of Chris capital investment vs. DCIT (supra), which has been reproduced hereinabove. 10.30. After considering the rival submissions and pursuing the relevant material on record, we find that the financial results of this company shows that this company is into business of providing IT enabled services/BPO services primarily to Citigroup entity globally. The operations of this company broadly comprises of transaction processing and technical services. Transaction processing includes the broad spectrum of activities involving processing, collections, customer care and payment in relation to services offered by Citigroup to its corporate and retail clients. The technical services offered by this company are in the nature of servicing and maintenance of software testing, verification and validation of software, which are akin to software maintenance services falling within the overall category of software development services and has created a lot of applications whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld that this company can be considered as a comparable. The Ld. TPO has to bring some material on record to show that s why this comparable was a bad comparable, in the previous year and in the succeeding year it is a good comparable. Admittedly neither the TPO nor the Ld. DR has been able to demonstrate the difference in the functionality and financial data. Hence following the rule of consistency, we are of the opinion that this company cannot be considered as comparable for the year under consideration. We therefore direct to exclude this comparable. Cosmic Global Ltd: 10.33. The ld.TPO had included this company as a comparable despite objections by the assessee. The assessee objected the inclusion of this company as the main revenue generation of this comparable is from medical transcription and consultancy services. Thus the ld.AR contended that this comparable is a high ended KPO. 10.34. Ld.DR, however, referred to the extracts made by the ld.TPO in the order to submit that Cosmic Global Ltd., is a comparable company with that of assessee. 10.35. After hearing the rival submission and pursuing the relevant material on record we find that this company was subj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for selecting the comparables. It is settled proposition that the decisive factor for determining inclusion or exclusion of any case as a comparable are prescribed under Rule 10B(2) which does not specify any such factor of turnover on the basis of which a particular case can be included or excluded in the list of comparables. In service industry, turnover does not play any significant role as far as the margins are concerned . This reinforces the view that turnover does not play a significant role in service industry and there is no link between turnover and margins . The turnover is not a relevant factor for choice of comparables has been confirmed in many decision, as listed below. 10.37 Further, the Ld. A.R. had submitted that the TPO had applied turnover filter of less than 1 crore for back office support segment as a criterion. It is observed that the Ld. TPO has not provided nay rational or logic for changing the said limits. Such an approach adopted by the TPO is not in accordance with law and against the principles of application of TP regulations. There ought to be a uniformity in treatment and consistency when the facts and circumstances are identical part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the tested party is following a different financial year ending (say 01/01/2010 to 31/12/2010), following the filter adopted by the ld.TPO, one would reject all the company with the financial year ending 31st of March 2010 and only consider companies with financial year ending 31/12/2010. The number of comparable companies available after using such a filter would be very limited and therefore, in such a case the net margin earned by the comparable companies would be different from the one that would be computed without using this filter. This view is supported by the coordinate bench of this Tribunal in the case of DCIT vs. McKinsey knowledge Centre India private limited in ITA No. 2195/del/2011 wherein it has been held that if a company is functionally comparable, it cannot be rejected merely on the ground that data for the entire financial year was unavailable, if the data can be reasonably extrapolated. Hon ble tribunal further observed that rule 10 B (4) cannot be interpreted in such a rigid manner so as to defeat the basic objective of the rule. The relevant extract of the ruling are reproduced below: 23. .. However, in our considered opinion, if a comparable is funct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10.44. The ld.TPO has rejected this comparable using turnover filter. We have dealt with this comparable above. It is also observed that the ld.TPO has not cited any instance of functional dissimilarity of this comparable company with that of the assessee under the segment. Relying upon the discussions made hereinabove we direct the ld.AO/TPO to consider these companies in the final list of comparables. 11. It is worthwhile to note at this juncture that the ld.TPO has cherry picked the comparable without considering the functional /similarity differences as well as insufficient data/information available on the public domain. It is also noted that the ld.TPO has to take reasonable approach while selecting/rejecting any of the comparables. The ld.TPO should not select any comparable on the basis of hypothetical approach. Merely because the accounting year ending is not similar, should not be a reason for rejecting a particular comparable without having any functional dissimilarity between the comparable with that of an assessee. The ld.TPO must consider a particular comparable company bit different any financial year ending if the data can be reasonably extrapolated. The l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransaction. Eventually, the Special Bench held that such an exchange rate fluctuation gain/loss arising from exports cannot be viewed differently from the sale proceeds. 34. In the context of transfer pricing, the Bangalore Bench of the Tribunal in SAP Labs India Pvt. Ltd. Vs ACIT (2011) 44 SOT 156 (Bangalore) has held that foreign exchange fluctuation gain is part of operating profit of the company and should be included in the operating revenue. Similar view has been taken in Trilogy E Business Software India (P) Ltd. Vs DCIT (20ll) 47 SOT 45 (URO) (Bangalore). The Mumbai Bench of the Tribunal in S. Narendra Vs Addl.CIT (2013) 32 taxman. com 196 has also laid down to this extent. In view of the foregoing discussion, we are of the considered opinion that the amount of foreign exchange gain/loss arising out of revenue transactions is required to be considered as an item of operating revenue/cost. However, it is made clear that it should be dealt with identically both in the calculation of the PLI of the assessee as well as the comparable under all the three segments. 12.2 The ld.AR submits that the facts are identical in the year under consideration vis- -vis that of as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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