TMI Blog2016 (12) TMI 1583X X X X Extracts X X X X X X X X Extracts X X X X ..... 1/Hyd/14, 301/Hyd/14 - - - Dated:- 16-12-2016 - SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER For The Assessee : Shri Sampath Raghunathan, AR For The Revenue : Shri P. Chandra Sekhar, DR ORDER PER B. RAMAKOTAIAH, A.M. : These are cross-appeals by Assessee and Revenue against the order(s) of the Commissioner of Income Tax (Appeals)-V, Hyderabad, dated 31-10-2013. 2. Briefly stated fact are, assessee-company, BA Continuum India Private Limited ['BACI'] (formerly known as CFC) (PAN-AACCC3062D) has merged with the BA Continuum Solutions Private Limited [BACS] (PAN -AACCC2310C) w.e.f. 01 April 2008. Assessee-company was engaged in the business of providing Information Technology [IT] and IT enabled services [ITES] to its Associated Enterprises ('AE'). 3. During the previous year relevant to AY.2007-08, assessee-company had the following international transactions: Sr. No. Description of International transaction Amount (Rs) Most appropriate method 1. Provision of software services 6,98,00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o make a TP adjustment amounting to ₹ 7,99,23,060/-. TPO has denied granting working capital adjustment to the assessee as requested. 8. The following are the 25 companies selected by TPO as per the TPO's order: Sr. No. Companies selected by TPO OP/OC(%) 1 Mold- Tek Technologies Ltd. (Seg) 113.49 2 Vishal Information Technologies Ltd. 51.19 3 eClerx Services Limited 89.33 4 Maple Esolutions Ltd. 34.05 5 Accentia Technologies Limited 38.26 6 Iservices India Pvt. Ltd. 50.27 7 H C L Comnet Systems Services Ltd. (Seg) 44.99 8 Aditya Birla Minacs Worldwide Ltd 11.98 9 Allsec Technologies Ltd 27.31 10 Apex knowledge S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r as assessee wished to file an appeal before the CIT(A) instead of filing an appeal before the Dispute Resolution Panel [DRP]. In view of the above letter filed by assessee, AO passed final assessment order u/s 143(3) r/w section 144C(4) of the Act on 25 February 2011. 12. Aggrieved by the order passed of AO/TPO, assessee preferred an appeal before the Ld. CIT(A) on 28 March 2011 with respect to the above mentioned TP adjustment and deduction u/s 10A of the Act. Ld. CIT(A) passed an order u/s 250 of the Act on 31 October 2013. The Ld. CIT(A) allowed partial relief for the grounds raised by assessee barring the ground on TP adjustment which was upheld by the Ld. CIT(A). With regard to assessee's ground on erroneous computation of margins of certain companies, the Ld. CIT(A) upheld the conclusions of TPO. 13. Aggrieved by the Ld. CIT(A) order, assessee filed present appeal before this forum. 14. Assessee raised eight grounds and the following four grounds are the principal grounds pertaining to TP adjustment: Ground No. 4: On the facts and in the circumstances of the case and in law, TPO erred in computing the operating margin/operating cost (i.e. PLI) of five comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he merger of the Company with the Appellant and thereby requesting for transfer of files of the Company from Mumbai income tax jurisdiction to Hyderabad income tax jurisdiction. Please find enclosed copy of the said letters vide Annexure 1 and 2 respectively. Thereafter, the Appellant got its name changed to BACI with effect from 15 September 2010 (enclosed along with appeal documents). The Company was served with a notice u/s 143(2) of the Income-tax Act, 1961 ('Act') by the Deputy Commissioner of Income Tax, Circle - 9(1), Mumbai (hereinafter referred to as 'Ld. Mumbai AO') for initiating regular assessment proceedings for the financial year ('FY') 2006-07. Since, the Company had international transactions during the FY 2006- 07, the Ld. Mumbai AO referred the international transactions reported by the Company in its Form 3CEB to the Additional Commissioner of Income Tax, Transfer Pricing-1(2), Mumbai (hereinafter referred to as 'Ld.TPO') u/s 92CA of the Act for verification of arm's nature of the said international transactions. TPO proposed to 'make a transfer pricing ('TP') adjustment of ₹ 7, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oach wherein, he has considered depreciation for the purpose of computing operating cost and thereby arriving at net cost plus margins. II. Flextronics Software Systems Limited ('Flextronics'): TPO at the time of computing the margin of Flextronics considered the financial statement of FY 2005-06, resulting in net cost plus margin of 14.54% instead of actual margin of 8.62% (before working capital adjustment) for FY2006-07. TPO has used current year data for all the companies selected as comparables, however for the purpose of computing margin of Flextronics, TPO has considered the wrong FY. Therefore, use of previous year's data for computation of margins of Flextronics is deviation from TPO's own stand. III. Iservices India Private Limited ('Iservices'): The margin computed by TPO at 50.27% is erroneous vis- avis the correct margin computation of 49.47% (before working capital adjustment). TPO has considered 'foreign exchange fluctuations' as non-operating in nature and excluded the same from the total cost of Iservices for determining the operating cost. However, while doing so, TPO has erroneously excluded the same twice from the tot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... final list of comparables selected by TPO for the reasons stated: i. Mold Tek Technologies Limited ('Mold Tek'); ii. Vishal Information Technologies Limited ('Vishal'); iii. eClerx Services Limited ('eClerx'); iv. Maple Esolutions Limited ('Maple'); i. Mold Tek Technologies Limited ('Mold Tek'): Functionally different: Moldtek should be rejected as comparable as it is engaged in providing engineering design services for construction of building by using design tools like CADI CAM, Stadd Pro by employing highly skilled software engineers for the purpose. These services are in nature of KPO and sharp contrast to the nature of work undertaken by assesseecompany. TPO did not agree to the contention of assessee that Moldtek functionally different and involved in high end KPO services. Ld. CIT(A) relied on TPO's order and rejected the contentions of assessee. 22.2. In this regard, assessee placed reliance on the following Judicial precedents for rejection of Moldtek as a comparable company: Maersk Global Centres (India) Private Limited vs. ACIT, Mumbai [I.T.A. No.7466/Mum/2012/AY 2008-09] ; Sympho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ] ; United Health Group Information Services Pvt. Ltd. [ITA No.6312/Del/2012/AY 2007-08] ; Calibrated Healthcare Systems India Pvt. Ltd. [ITA No. 527l/Del/201 2/AY 2007-08] ; Hyundai Motors India Engineering P. Ltd. [ITA No.1 850/Hyd/20 12/A Y 2007-08] iv. Maple Esolutions Limited ('Maple'): Unreliable financials: It was the contention that the directors of Maple were found to be involved in fraud and accordingly its financial statements cannot be trusted and are not reliable. TPO did not agree to the contention of assessee and rejected the submissions. Ld. CIT(A) relied on TPO's order and rejected the contentions of assessee. Assessee placed reliance on the following Judicial precedents for rejection of Maple as a comparable company: Capital IQ Information systems (India) Pvt. Ltd., Hyderabad Vs. DCIT [ITA No. 1961/Hyd/2011] 22.3. Ld. DR in reply however, submitted that as far as Maple is concerned, the fraud has occurred in earlier year and Coordinate Bench at Bangalore has accepted the comparable in their order in M/s. Akamai Technologies India Pvt. LTd., in IT(TP)A No. 879/Bang/2013 dt. 16-03-2016. This company is to be accepted as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... objected to as it is involved in KPO business. This company is already excluded in the Co-ordinate Bench decision cited above in the submissions. Respectfully following, we direct the TPO to exclude this company. 23.4. Maple Esolutions Ltd: This company also has unreliable financials as directors of Maple Esolutions Ltd., are found to be involved in fraud. Under Company Law, once director is involved in fraud, the offence continues for later years also. This company is excluded in the Co-ordinate Bench decision in Hyderabad in the case of Capital IQ Information Systems (India) Pvt. Ltd. Therefore, respectfully following the same, we direct the TPO to exclude the above company. 23.5. The Grounds are allowed accordingly. 24. Working Capital Adjustments: the ground pertaining is as under: Ground No. 7: On the facts and in the circumstances of the case and in law, TPO erred and the Ld. CIT(A) further erred in upholding/ confirming the action of TPO in rejecting the claim of working capital adjustment of 2.27% and not providing downward adjustment to the mark-up of comparable companies in-spite of being quantified by the Appellant. 24.1. Assessee submitted that there ..... 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