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2016 (7) TMI 1297 - ITAT DELHI

2016 (7) TMI 1297 - ITAT DELHI - TMI - TPA - selection of comparable of Techprocess Solutions Ltd. - Held that:- TPO rejected this company on the ground of non-availability of financial data and annual report. The assessee has pointed out that application dated 20.10.2015 filed before the ld. DRP u/r 13 of IT DRP Rules that the ld. TPO has rejected the comparables selected by the assessee holding that data of the company for the relevant financial year was not available in the public domain, how .....

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und No. 6 of the appeal is allowed for statistical purposes. - Remit the matter to the ld.TPO for including R. Systems International Ltd. in the list of comparables for working out the PLI of the assessee. We also make it absolutely clear that it would be the duty of the assessee to substantiate the financial information with respect to R Systems International with authentic and reliable data. The ld. TPO or the Assessing Officer are also directed to verify and assure them about the reliabil .....

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, the assessee has submitted the claim at page No. 280, risk adjustment computation with respect to set of comparables. We do not find any sound reasoning given by the ld. TPO, who did not state how the data submitted by the assessee is not reliable. Therefore, in the interest of justice, we set aside this matter to the file of the ld. TPO to verify the computation of risk adjustment submitted by the assessee and to allow the same after proper verification and if found in accordance with law. In .....

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4C of the Income-tax Act, 1961 (in short the Act ) and the order of the Assessing Officer, Ward 1(3) dated 29.10.2015 incorporating the directions of learned Dispute Resolution Panel (DRP) on the order of Transfer Pricing Officer (TPO) passed u/s. 92CA(3) dated 07.01.2015 after directions of ld. DRP u/s. 144C(5) of the Act. The appellant has raised in all 13 grounds of appeal as under : 1. The assessment order passed by the Income Tax Officer, Ward 1(3), New Delhi [Learned Assessing Officer ( Ld .....

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inciple prescribed under the Income-tax Act, 1961 ( the Act ). 3. On facts and in law, the Hon ble DRP, Ld. AO and Ld. TPO erred in disregarding the Assessee s use of multiple year/ prior years data in contravention of the provision of section 92C of the Act read with Rule 10B and Rule 10D(4) of the Income-tax Rules, 1962 ( the Rules ). 4. On facts and in law, the Hon ble DRP, Ld. AO and Ld. TPO erred in disregarding the doctrine of impossibility of performance in contravening section 92D of the .....

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us, ignoring the provisions of Rule 10B(2). 6. On facts and in law, the Hon ble DRP erred in ignoring the annual report of Techprocess Solutions Ltd. duly furnished by the Appellant before them and consequently confirming the action of the Ld. TPO of rejecting this company on ground of non-availability of financial data/ annual report. 7. On facts and in law, the Hon ble DRP erred in disregarding the computation of operating profit margins for financial year 2010-11 of R Systems International Lt .....

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n 92C(3) of the Act read with Rule 10B(2) of the Rules. 9. On facts and in law, the Hon ble DRP erred in ignoring the incorrect margins of the comparable companies selected by the Ld. TPO. 10. On facts and in law, the Hon ble DRP, Ld. AO and Ld. TPO erred in not allowing a risk adjustment under Rule 10B(1)(e) and Rule 10B(3) for determination of the ALP to account for the difference in the risk profile of the Appellant, a low-risk service provider, and of the comparable companies, that are full- .....

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pronouncements in this regard. 12. On the facts and in the circumstances of the case, the Ld. AO erred in initiating penalty proceedings under section 271(1)(c) of the Act. 13. On facts and in law the Ld. AO made computational errors in calculating the tax demand alongwith interest under section 234B of the Act. 2. The assessee filed its return of income on 29.11.2011 showing an income of ₹ 23,19,782/- which was subsequently revised on 27.04.2012 to ₹ 24,72,931/-. During the course o .....

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see. The ld. TPO passed an order u/s. 92CA(3) vide order dated 07.01.2015 proposing an adjustment on account of ITES of ₹ 2,72,34,266/- and on account of receivables of ₹ 18,61,066/- totaling to ₹ 2,90,95,332/-. Based on this, the ld. Assessing Officer passed a draft assessment order on 02.02.2015 wherein in the normal computation of income, addition of ₹ 2,90,95,332/- was proposed and determined the taxable income at ₹ 3,15,68,262/- and further, on the book profit .....

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rections dated 31.08.2015 disposed of the objections of the assessee. Consequently, in the final assessment order, transfer pricing adjustments were made of ₹ 2,33,48,693/- in the normal computation of total income assessing the total income of the assessee at ₹ 2,58,21,623/-. Further, the book profit was increased by TP adjustment of ₹ 2,33,48,693/- against the book profit declared by the assessee of ₹ 2,05,21,759/-, assessing the book profit at ₹ 4,38,70,452/-. Th .....

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essee in its TP documentation, i.e., T.P. study report has used transaction net margin method (TNMM) as the most appropriate method and used operating profit (OP) / total cost (TC) as the profit level indicator (PLI). The assessee has used 12 comparables with an average margin of 12.37% using the multiple year data and compared it with margin of the assessee at 12.01% and has submitted that its international transactions are at arm s length. The ld. TPO rejected the transfer pricing documentatio .....

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g the interest rate of 10.84%, made an adjustment on account of receivables of ₹ 18,61,066/-, making total adjustment of ₹ 2,90,95,332/-. On objection before the DRP, 8 comparables remained where the arithmetic mean of PLI taking OP/TC of 25.51% and final adjustment of ₹ 2,33,48,693/-. Further, the assessee filed rectification application before the ld. DRP on 20.10.2015 which is pending for adjudication. 5. Ground No. 1 of appeal is general in nature and no specific arguments .....

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pplication dated 20.10.2015 filed before the ld. DRP u/r 13 of IT DRP Rules that the ld. TPO has rejected the comparables selected by the assessee holding that data of the company for the relevant financial year was not available in the public domain, however, the assessee has submitted the annual report of that company for F.Y. 2010-11. On objection before the ld. DRP, the stand of the TPO was upheld without considering the annual report submitted by the assessee. This application is pending ad .....

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d by the TPO. At page No. 7 of the order of the TPO in para No. 4, he has rejected this company, as it follows December ending. On objection before the DRP, the assessee submitted the comparable derived financial data of the company based on the information available in public domain for comparable 12 months for F.Y. 2010-11. This data was also submitted in ground No. 5 before the ld. DRP which vide para No. 3.5 stated that the use of same financial year as transaction has support of IT Act, Rul .....

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comparable company is found to be functionally comparable, it should not be excluded solely on the ground of having different financial year : (i). Mercer Consulting (India) P. Ltd., ITA No. 966/Del./2014. (ii). DCIT vs. Mc Kinsey Knowledge Centre, ITA No. 2195/Del./2011 (iii). Vodafone India Services (P) Ltd. ITA No. 7140 & 7097/Mum/12 9. The ld. DR relied on the orders of the ld. DRP and the ld. TPO. He further submitted that when the data of different financial year are available than ac .....

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. On perusal of that statement, it is apparent that R. Systems International Ltd. is flowing January to December as financial year and based on that the assessee has derived three months data of January to March, 2011 and thereafter worked out comparable data for financial year from April to March, 2011. In our view, the arguments of the assessee merit consideration. Our view is further supported by the decision of coordinate Bench in the case of Mercer consulting (India) Pvt. Ltd. vs. DCIT (sup .....

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s not comparable. The assessee is contesting the exclusion of this case. 11.2. The ld. AR fairly conceded that R. Systems was following calendar year for maintaining its annual accounts and, as such, the assessee adopted data for 31.12.08 for including it in the list of comparables. It was, however, stressed that this case ought not to have been excluded on this count alone, when it was otherwise comparable. The ld. DR opposed this contention by placing reliance on certain decisions in which it .....

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o the financial year in which the international transaction has been entered into 11.4. On circumspection of the above part of this sub-rule, it comes to fore that the comparability of an uncontrolled transaction can be analysed with the data relating to the financial year in which the transaction has been entered into. As per this mandate, it is clear that if the tested party has March ending, then the comparables must also have the data relating to the financial year ending on 31st March itsel .....

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t page 144 of the assessee s paper book. It can be seen from the audited accounts of R. Systems that the data for year ending 31.12.08 has been given under one column and the data for quarter ending 31.3.09 and 31.3.08 (both audited) has been given in the other two columns. This shows that if we take up the yearly data ending 31.12.08 and exclude the results of quarter ending 31.3.08 and include the results of quarter ending 31.3.09, what we get is the data for the financial year ending 31.3.09, .....

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otherwise comparable company having a different financial year cannot be considered as comparable. But 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, then it cannot be held as not passing the test given under sub-rule (4) of rule 10B. In the case under consideration before the Mumbai Bench, there is no mention of the audited quarterly data of such comparable being available .....

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mparable case. 11.7. We find that R. Systems International Ltd. has been excluded by the TPO solely for the reason that its financial year is different without considering that the data for the financial year adopted by the assessee can be easily compiled from the audited statements of such company. We, therefore, set aside the impugned order on this issue and remit the matter to the TPO/AO for including the case of R. Systems International Ltd. in the list of comparables by working out the figu .....

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ic and reliable data. The ld. TPO or the Assessing Officer are also directed to verify and assure them about the reliability of the information. After this verification, the above company may be treated as proper comparable if found proper on such examination. In the result, ground No. 7 of the appeal of the assessee is allowed accordingly. 12. Ground No. 8 is against selection of certain companies which are not comparable to the assessee as far analysis. The assessee has contested the following .....

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d abnormal profits. The ld. TPO rejected all these arguments stating that the company operates under single segment and outsourcing of the work cannot be a criterion for rejection of the comparable. He further stated that the intangible asset is the normal usage by every IT and ITES company. Therefore, he included it as comparable. The ld. DRP also rejected the objection of the assessee on this count vide para No. 3.6.1 of its order. 14. The learned AR of the assessee submitted before us that th .....

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te of that he submitted in his synopsis, the functions performed by this company and demonstrated that it is full fledged entrepreneur carrying greater risk compared to the assessee. He further stated about the outsourcing model, substantial sealing in market expenses and also drawn our attention that there is extra ordinary event during the year. He further relied on the decisions of Hon ble Delhi High Court in thecae of Rampgreen Solutions Pvt. Limited vs. CIT and also Agnity India Technologie .....

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te Bench has held that this company is functionally different after comparing the business profile of that company. The coordinate Bench has held as under : 44. The next ground no. 7, raised by ld. counsel for the assessee is regarding inclusion of eClerx Services Limited. Ld. counsel pointed out that this company is a data analytical knowledge process outsourcing service provider. It provides data analytics, data management and process improvement solutions to global enterprise clients, mainly .....

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ng data analytics, data management and process improvement solutions to global enterprise clients, eClerx supports its clients through two business units - Financial Services and Sales and Marketing Support. x x x x x x x x x In the Capital Markets division, the Company today provides end-toend financial transaction support services such as trade booking, trade confirmation, asset servicing, cash settlements, client servicing, risk management and reference data integrity across all asset classes .....

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de content development and management, search engine management, web operations, pricing and customer analytics, product database management and catalog audits. The Company is also pursuing a strategy of creating a portfolio of platform attached services, by creating a suite of services that are complementary to industry standard IT platforms. 46. Ld. counsel further submitted that this comparable has to be excluded in view of the decision of Hon ble Delhi High Court in the case of Rampgreen Sol .....

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ng ALP by comparing controlled transactions/entities with similar uncontrolled transactions/entities. ITeS encompasses a wide spectrum of services that use Information Technology based delivery. Such services could include rendering highly technical services by qualified technical personnel, involving advanced skills and knowledge, such as engineering, design and support. While, on the other end of the spectrum ITeS would also include voice-based call centers that render routine customer support .....

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ties. Treating the said entities to be comparables only for the reason that they use Information Technology for the delivery of their services, would, in our opinion, be erroneous. 47. After hearing both the parties, we direct the ld. TPO to exclude this comparable from the list of comparables in view of decision of Hon ble Delhi High Court as this company is functionally different, which is evident from the business profile of eClerix, reproduced earlier from Annual Report. Therefore, following .....

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operates primarily into business process Management Services and taxpayer has not shown how brand and ownership of intangibles is leading to high profit margin. The ld. DRP also rejected the objection of the assessee. 18. The learned AR of the assessee submitted before us that this comparable has been considered in appellant s own case for assessment year 2010-11 by the coordinate bench and following the decision of Hon ble Delhi High Court in the case of Rampgreen Solutions, has held that it is .....

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ng model, substantial sealing in market expenses and also drawn our attention that there is extra ordinary event during the year. He further relied on the decisions of Hon ble Delhi High Court in thecae of Rampgreen Solutions Pvt. Limited vs. CIT and also Agnity India Technologies vs. ITO over and above assessee s own case for assessment year 2010-11. He also submitted that Hon ble Bombay High court in the case of Pantaire Water India Pvt. Ltd. has excluded this company on account of wide differ .....

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denying of the fact that Infosys BPO operates on a large scale and caters to wide variety of customers operating in different industries. Ld. counsel has filed before us extracts from the annual reports and white paper issued by Infosys in regard to Process Progression Model ( PPM ), a holistic model to transform business processes . 39. A birds eye view of the said model makes it clear that it involves various processes which are aimed at coping with various challenges which impede the business .....

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igher margin because it is primarily the customer s satisfaction which is relevant in selecting the service provider even at the payment of higher margins. 40. In Merker equitable service centre India Pvt. Ltd. 133 ITD 543, it was held that Infosys BPO cannot be considered as a comparable to a captive service provider, like assessee. 41. Ld. DR has submitted that Actis is also a brand and, therefore, adjustment should be made for the difference. We are unable to accept this contention particular .....

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ItA no. 1781/Hyd/2011) - Capital IQW Information Systems (India) Pvt. Ltd. Vs. DCIT (Int. Taxation) (ITA no. 1961/Hyd/2011) 26 ITA 30/Del/2015 - Triniti Advanced Software Labs (P) Ltd. (2011-TII-92-ItAT-Hyd-TP). Agnity India Technologies Vs. ITO ITA 1204/2011 Delhi High Court - In this case it was emphasized that Infosys Technologies Ltd. could not be considered as a comparable being a giant company. The same principle is applicable to Infosys BPO also. 42. In view of above discussion, we direct .....

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bility, incomparable scale of operation, payment of brand equity and presence of intangibles and volatile profit margins. Further, the assessee contended that the TPO did not select the same comparable last year. The ld. TPO held that it is an ITES company and therefore, functionally comparable. On objection before the ld. DRP, the objections were rejected. 22. Before us, the ld. AR submitted that this company is engaged in services like software testing, verification and validation and data cen .....

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is comparable should be excluded. 23. The ld. DR relied on the orders of the ld. DRP and further cited the reasons stated in para 3.6.3 of that order. He vehemently argued that this comparable is functional comparable and should not be excluded. 24. We have carefully considered the rival submissions and also referred to page No. 247 of the paper book filed before us wherein relevant extracts from annual reports shows that it includes technical services like software testing, verification and val .....

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ITES company like appellant. Further, the decision of the coordinate Bench in the case of Ameriprise India Pvt. Ltd. has considered in ITA No. 7014/Del./2014 at para No. 12 has excluded this company as under : 12. TCS e-Serve Ltd. 12.1 The assessee objected to its inclusion by contending that this is exceptional year of operation for this company as it is the first full year of operations after its takeover by TCS. It was also contended that this company is functionally dissimilar and the segme .....

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amp; Loss Account in standalone financials of the Company it was pointed out that during the relevant financial year, the Company has received Income of ₹ 1,35,94,110/- from Transaction Processing and Other Services. On referring to Schedule O - Notes to Accounts it is given that - Background and principal activities TCS e-Serve Limited is engaged in the business of providing Information Technology - Enables Services (ITES) / Business Process Outsourcing (BPO) services, primarily to Citigr .....

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ote that Segmental Information given in Point No. 8 of Schedule O - Notes to Accounts in standalone financials of the annual report shows that Company is engaged in Business Process Outsourcing (transaction processing) services to the Banking & Financial Services Industry (BFSI), which is considered as a single segment. 12.4 It was fairly conceded by Ld. AR that this company has been considered as Comparable by the Delhi Bench of Tribunal in Techbook International P. Ltd. (supra), by observi .....

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technical services involving software testing, verification and validation of software etc. Since the functional profile of this company on a broader basis is no different from that of the assessee, both being involved in rendering ITES, we are not inclined to treat this company as incomparable. The ld. AR argued that the nature of the ITES provided by this company is different from that of the assessee and hence the same be excluded. We are disinclined to sustain this objection. Matching of th .....

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the way suggested by the ld. AR under the TNMM, then it will be very difficult, if not impossible, to find out a ditto comparable. A company which satisfies the broader parameters of comparability in the overall same segment, cannot be excluded due to somewhat different nature of such overall activity. An examination of the comparables chosen by the assessee, which have been accepted by the TPO, also satisfy only the test of overall similarity and not the peculiar similarity, as has been now co .....

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e. On a careful reading of the decision of coordinate Bench in Techbook International P. Ltd. (supra) it is clear that Schedule O - Notes to Accounts in respect to carried out by Company and relevant segmental details were never brought to the attention of the Bench. We find that in the absence of the availability of any such segregation of the total revenue of this company, it is not possible to separately consider its profitability from rendering of Transaction processing services . Thus, the .....

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Private Limited, Infosys BPO Limited and TCS E-Serve Limited from the final set of comparables. In the result, ground No. 8 of the assessee s appeal is allowed. 26. Ground No. 9 of the appeal of assessee is against incorrect margin of comparable companies selected by the ld. TPO. The ld. AR has drawn our attention to ground No. 7 of the objections raised by the assessee, which is subject matter of application under Rule 13 in rectification application dated 20.10.2015. According to that applicat .....

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easons for difference are also stated in column No. 4 of the below mentioned chart : S.No. Name of the company Correct OP/TC as per Assessee (%) OP/TC as per TPO (%) Reasons for difference (Treatment by Ld. TPO) 1 Jindal Intellicom Ltd. 10.96 13.70 Miscellaneous balances written back, bad debts recovered, provision no longer required written back, provision for doubtful debts treated as non-operating 2 e4e Healthcare Business Services Private Ltd. 9.69 9.77 Provision no longer required written b .....

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und in accordance with law, the respective correction after proper verification may be allowed. Needless to say that in case of any difference of opinion between the ld. TPO and the submissions made by the assessee, reasonable opportunity of hearing may be granted to the assessee. In the result, ground No. 9 of appeal is allowed accordingly. 28. Ground No. 10 of appeal is against the risk adjustment claimed by the assessee rejected. The assessee claimed before the ld. TPO that the assessee is a .....

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also perused the OECD guidelines relied upon by the ld. TPO. The OECD guidelines state that no adjustment can be allowed in absence of any reliable data. However, in the present case, the assessee has submitted the claim at page No. 280, risk adjustment computation with respect to set of comparables. We do not find any sound reasoning given by the ld. TPO, who did not state how the data submitted by the assessee is not reliable. Therefore, in the interest of justice, we set aside this matter to .....

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O during the course of examination has held that overdue receivables constitute an international transaction and therefore, interest thereon needs to be imputed. 31. The ld. AR submitted that this issue is covered in favour of the assessee by the decision of coordinate Bench in assessee s own case in ITA No.30/Del./2015 for A.Y. 2010-11. 32. We have carefully considered the contention of the assessee and we agree with its arguments. The coordinate Bench in the assessee s own case in para No. 59 .....

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