TMI Blog2016 (8) TMI 1221X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee in its appeal no.111(B)/2012 are as under; The grounds stated hereunder are independent of, and without prejudice to one another. The Appellant submits as under: 1 Assessment and reference to Transfer Pricing Officer are bad in law a) The final assessment order issued by the Deputy Commissioner of Income-tax, Circle 12(3) ['DCIT' or 'AO'], is bad on facts and in law, and is in violation of the principles of natural justice. Without prejudice to the above, the order issued by the AO is bad in law insofar as the fact that the AO did not issue to Swiss Re Shared Services (India) Private Limited ('the Appellant or 'the Company'), a show cause notice, as per proviso to section 92C(3) of the Incometax Act, 1961 ['the Act']. b) The AO has erred in law in making a reference to the Deputy Commissioner of Income Tax - Transfer Pricing - V ['TPO'], inter alia, since he has not recorded an opinion that any of the conditions in section 92C(3) of the Act, were satisfied in the instant case. The AO also erred in not following the provision contained in section 92CA (1) of the Act. 2. The fresh comparable search un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies having export revenues less than 25% of total sales. i) The AO/TPO also erred on facts in arbitrarily rejecting companies based in their financial results without considering the functional comparability. j) The AO/TPO erred on facts and in law in considering a set 'secret data', i.e. data which was not available in public domain, in arriving at a fresh set of companies using his power under section 133(6), which is grossly unjustified. K ) The AO/TPO also erred on facts and in law in excluding the foreign exchange gain or loss while calculating the net margins of the comparable companies. 4 Erroneous data used by the AO/TPO a) The AO/TPO has erred in law in using data, which was not contemporaneous and which was not available in the public domain at the time of conducting the transfer pricing study by the Appellant. b) The AO/TPO erred in law in not applying the multiple-year data while computing the margin of alleged comparable companies as such data had an influence in determining the pricing policy of the Appellant. 5 Non-allowance of appropriate adjustments to the comparable companies, by the AO/TPO The AO/TPO erred in law and on facts i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omputing deduction under section 10A insofar as it directed that travelling expenses incurred by the Appellant has to be reduced from export turnover since such expenses are attributable to the delivery of computer software outside India. e) Without prejudice to the above, having given the directions to make adjustment to 'export turnover', the Honorable DRP erred in not giving a direction for making a corresponding adjustment to the 'total turnover' as well. 10 Relief a) The Appellant prays that directions be given to grant all such relief arising from the above grounds and also all relief consequential thereto. b) The Appellant craves leave to add to or alter, by deletion, substitution, modification or otherwise, the above grounds of appeal, either before or during the hearing of the appeal. c) Further, the appellant prays that the adjustment in relation to transfer pricing maters made by the ld.AO/TPO and upheld by Hon ble DRP is bad in law and liable to be deleted . 4. The grounds raised by the revenue in its appeal no.172 (B)/2012 are as under; 1. The order of the Learned CIT(A) in so far as it relates to the following grounds is opp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n this basis that this company has failed 0% RPT filter. He submitted that now the settled position on this issue is that any company having RPT percentage up to 15% is a good comparable. He submitted that in view of this, this comparable may be reinstated. 7. Regarding the second comparable M/s Safron Global Ltd., he submitted that this comparable was accepted by the ld. CIT(A) and the assessee also accepts it. 8. Regarding third comparable i.e. M/s Vishal Information Tech. Ltd., it was submitted that this comparable was accepted by the ld. CIT(A), but the assessee is contending that this comparable should be rejected because this is not functionally comparable company. He also submitted that this company fails employees cost filter also because the employees cost is only 0.9% in this case and hence, major portion of work is out sourced by this company. 9. Regarding the fourth comparables M/s Cosmic Global Ltd., (earlier known as Tulsyan Technology), he submitted that this comparable was accepted by the ld. CIT(A) and the assessee also accepts it. 10. Regarding the fifth comparables i.e. M/s Transworks Information Services Ltd., he submitted that the ld. CIT(A) has rej ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15% and when 15% filter is applied, these three companies satisfies the RPT filter. These three companies are; a) M/s Allsec Technologies Ltd., b) M/s Transworks Information Services Ltd., c) Ace Software Exports Ltd., Hence, we hold that these three comparables rejected by the ld. CIT(A) by applying 0% RPT filter are good comparables because these companies are satisfying 15% RPT filter and there is no other basis pointed out by any side to reject any of these comparables. 16. Regarding M/s Wipro BPO Solutions Ltd., which was rejected by the ld. CIT(A) by applying 0% RPT filter, We find that this company fails even 15% RPT filter and therefore, we find no reason to interfere with the order of the ld. CIT(A) regarding this company. 17. Regarding M/s Saffron Global Ltd., the ld, CIT(A) has accepted the company as a good comparable and is not being objected by the assessee before us. Hence, on this aspect also, no interference is called for in the order of the ld. CIT(A). 18. Regarding M/s Vishal Information Tech. Ltd., we find that this comparable was accepted by the ld. CIT(A) but this is being disputed by the assessee before us on this basis that this company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the AO did not issue to Swiss Re Shared Services (India) Private Limited ('the Appellant or 'the Company'), a show cause notice, as per proviso to section 92C(3) of the Income-tax Act, 1961 ['the Act']. d)The AO has erred in law in making a reference to the Deputy Commissioner of Income Tax - Transfer Pricing - V ['TPO'], inter alia, since he has not recorded an opinion that any of the conditions in section 92C(3) of the Act, were satisfied in the instant case. The AO also erred in not following the provision contained in section 92CA (1) of the Act. 2 The fresh comparable search undertaken by the TPO is bad in law b)The AO/TPO erred on facts and in law in conducting fresh benchmarking analysis using non contemporaneous data and substituting the Appellant's analysis with fresh benchmarking analysis on his own conjectures and surmises. Thus the Appellant prays that the fresh benchmarking analysis conducted by the learned TPO is liable to be quashed. c)On the facts and in the circumstances of the case and in law, the learned TPO erred in not demonstrating that the motive of the Appellant was to shift profits outside of India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... while calculating the net margins of the comparable companies. 4 Erroneous data used by the AO/TPO c)The AO/TPO has erred in law in using data, which was not contemporaneous and which was not available in the public domain at the time of conducting the transfer pricing study by the Appellant. d)The AO/TPO erred in law in not applying the multipleyear data while computing the margin of alleged comparable companies as such data had an influence in determining the pricing policy of the Appellant. 5 Non-allowance of appropriate adjustments to the comparable companies, by the AO/TPO The AO/TPO erred in law and on facts in not allowing appropriate adjustments under Rule 10B to account for, inter alia, differences in (a) accounting practices, (b) marketing expenditure, (c) research and development expenditure and (d) risk profile between the Appellant and the comparable companies. 6 Variation of 5% from the arithmetic mean The AO/TPO erred in law in not granting the benefits of proviso to section 92C(2) of the Act available to the Appellant. 7 Deduction under section 10A of the Income-tax Act, 1961 b)On the facts and circumstances of the case, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to grant all such relief arising from the above grounds and also all relief consequential thereto. e)The Appellant craves leave to add to or alter, by deletion, substitution, modification or otherwise, the above grounds of appeal, either before or during the hearing of the appeal. c) Further, the appellant prays that the adjustment in relation to transfer pricing matters made by the ld. AO/TPO and upheld by the Hon ble DRP is bad in law and liable to be deleted. . 22. The ld. AR of the assessee submitted a chart and it was agreed by both sides that the appeal of the assessee may be decided on the basis of this chart. As per this chart, 27 comparables are selected by the TPO with adjusted average mean of 28.33%. Out of these 27 comparables, the assessee is seeking exclusion of 8 comparables which are as under; 1) M/s Eclerz Systems Ltd., 2) M/s HCL Comnet Systems Services Ltd., (Seg.) 3) M/s Infosys BPO Ltd., 4) M/s Maple E-Solutions Ltd., 5) M/s Moldtek Technologies Ltd., (Seg.) 6) M/s Triton Corp Ltd., 7) M/s Vishal Information Technologies Ltd., 8) M/s Wipro Ltd., (Seg.) 23. The ld. AR of the assessee placed reliance on the Tribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... providing solutions that do not just reduce cost, but help the clients increase sales and reduce risk by enhancing efficiencies and by providing valuable insights that empower better decisions. M/s eClerx Services Pvt. Ltd, is also claimed to have a scalable delivery model and solutions offered that include data analytics, operations management, audits and reconciliation, metrics management and reporting services. It also provides tailored process outsourcing and management services along with a multitude of data aggregation, mining and maintenance services. It is claimed that the company has a team dedicated to developing automation tools to support service delivery. These software automation tools increase productivity, allowing customers to benefit from further cost saving and output gains with better control over quality. Keeping in view the nature of services rendered by M/s eClerx Services Pvt. Ltd. and its functional profile, we are of the view that this company is also mainly engaged in providing high-end services involving specialized knowledge and domain expertise in the field and the same cannot be compared with the assessee company which is mainly engaged in providing l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... On the other hand, the learned departmental representative has relied upon the orders of the authorities below and submitted that the TPO has examined the functional comparability of this company and found that this company complies with filters applied by the TPO. Accordingly, this is a good comparable for determining the ALP in respect of international transactions in the ITES segment. 8.2.1 We have considered the rival submissions as well as the relevant material on record. At the outset, we note that HCL Comnet System Services Ltd. (seg.) is following its accounting year from 1st July to 30th June. For the year under consideration, the financial accounts are prepared for the year ended on 30th June, 2007. Therefore, it is clear that for the financial year under consideration, only partial data are available from 1st July 2006 to 31st March 2007. At the outset, we note that an identical issue has been considered by this Tribunal in a series of decisions as relied upon by the assessee and referred (supra). In the case of Sandstone Capital Advisors (P.) Ltd. (supra), the Tribunal vide its order dated 6/2/2013 held in para 10 to 10.3 as under: 10. We have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal, after considering the prescription of Rule I0B(4) and an another case the Tribunal in Honeywell Automation India Ltd., has mandatory for the purposes of comparing the data of m wpm transaction with an international transaction that the to the financial year ending similar to that of the assessee. The ld. DR contended that since the case of CMC Limited financial year ending vis-a-vis that of the assessee, have been excluded. No contrary precedent was brought to our notice by the learned AR. In fact, the argument advanced by this regard was not seriously challenged by the ld. AR, following the precedent, we hold that this case should from the list of comparables. Accordingly, by following series of decisions of the Tribunal on the point, we hold that this company cannot be treated as a good comparable for the purpose of determining the ALP. Hence, the AO/TPO is directed to exclude this company from the list of comparable for the purpose of determination of ALP. 8.3 Infosys Technologies Ltd. The learned AR of the assessee has referred to the Annual Report of this company at page 57 of the paper book and submitted that though this company was initiall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir meeting held on October 6, 2008. approved, subject to the approval of the Honorable High Courts of Karnataka and Chennai, a Scheme' of amalgamation ( the Scheme ) to amalgamate PAN Financial Services India Private Limited ( PAN Financial ) , a wholly owned subsidiary of the Company engaged in providing business process management of services, with the Company with effect from April 1, 2008 ( effective date ). The approval of the High Court was received on April 6, 2009 and filed with the respective Registrar of Companies of Karnataka and Tamilnadu on April 6, 2009 and March 10, 2009 respectively. Accordingly on the scheme becoming effective, the financial statement of PAN Financial has been merged with the company. It is clear that there was extraordinary event of amalgamation during the year under consideration. Therefore, in view of the extraordinary development of amalgamation of another company, this company cannot be considered as a good comparable for the assessment year under consideration, Apart from this, we further note that as per the segment reporting in para. 16.2.21 of Annual Report this company is providing business process m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cord. We find force and substance in the argument of the learned departmental representative that in the absence of any specific allegation that the alleged fraud by the director is in respects of business activity of the company, the said activity of fraud by the director in other business activity not related to the business of the assessee-company cannot be taken as a ground for doubting the financial statement of the assessee and thereby excluding the said company from a list of comparables. However, we find that this Tribunal in a number of cases as relied upon by the assessee, has held that this company cannot be taken as a good comparable because of the reason that the directors of the company were involved in fraud activity and therefore, financial statements of this company cannot be relied upon. In the case of First Advantage Offshore Services (P.) Ltd. (supra) the Tribunal has held in para. 41 as under: 41. As far as the companies Mapel ESolution Ltd and Triton Corp Ltd., the learned counsel for the assessee submitted that these two companies are to be excluded from the list of comparables, as for the relevant assessment year, they were allegedly involved in fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tekmen Tool (P.) Ltd. The scheme of amalgamation was approved by the Hon'ble Andhra Pradesh High Court vide order dated 15/07/2008 therefore, there was amalgamation and demerger in respect of this Co. during the year under consideration. He has referred to the business activity of the said Co. as involved in the structural engineering KPO. Thus, the learned AR has submitted that this Co. is entirely in the different nature of activity and functions which is not comparable with the assessee. In support of his contention he has relied upon the decisions of the Special Bench of Mumbai (supra). The learned AR has pointed out that this Co. is declaring only one segment operating revenue therefore, this cannot be compared with the assessee. 8.5.1-2 On the other hand, learned DR has relied upon the orders of the authorities below and submitted that this Co. is in the field of ITES and therefore, functionally comparable with the assessee. 8.5.3 We have considered the rival submissions as well as the material on record. At the outset, we note that functional analysis of the Co. has been examined by the Special Bench in the case of Maersk Global Centers India (P.) Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovision for derivative loss of ₹ 6.43 Crores made by Mold Tek Tech. Ltd. was excluded by the AO treating the same as non-operating expenses whereas in the case of Rusabh Diamonds v. Asstt. CIT [reported at (2013) 155 TTJ (Mum.) 386 (2013) 89 DTR (Mum.) (Trib.) 57 Ed] it was held by the Division Bench of this Tribunal that the gain or loss arising from the forward contract entered for the purpose of foreign currency exposure on the export and import has to be taken into consideration while computing the operating profit. 83. For the reasons given above, we are of the view that if the functions actually performed by the assessee company for its AE are compared with the functional profile of M/s eClerx Services (P) Ltd and Mold-Tek Technologies Ltd. it is difficult to find out any relatively equal degree of comparability and the said entities cannot be taken as comparables for the purpose of determining ALP of the transactions of the assessee company with its AEs. We, therefore, direct that these two entities be excluded from the list of 10 comparables finally taken by the AO/TPO as per the directions of the DRP. 8.5.4 The Special Bench has examined the functi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO/TPO to exclude Mold Tek from the list of comparables. 8.6 Tricom Corporation Ltd. The learned AR of the assessee has submitted that the financial statements of this company cannot be relied upon for the purpose of determining ALP because of the directors of this company involved in the fraud. He further submitted that there was merger during the year under consideration. Therefore, this company cannot be considered as a good comparable. In support of his contention, he has relied upon the following decisions: i. First Advantage Offshore Services (P.) Ltd.'s case (supra) ii. Stream International Services (P.) Ltd.'s case (supra) On the other hand, learned Departmental Representative has relied upon the order of the authorities below. 8.6.1 We have considered the rival submissions as well as relevant material on record. We note that the comparability of this company has been examined by the Tribunal in the case of First Advantage Offshore Services (P.) Ltd. (supra) which has already been reproduced in the foregoing paragraphs. This company has merged with Mold-Tek Technologies Ltd. during the year under consideration. In view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be less skilled compared to software development segment, the number of employees would definitely be more and thus the employee cost would be high and thus application of employee cost filter to the ITES sector is also justified. In view of the same, we direct the TPO to apply the employee cost filter to exclude companies with employee cost of less than 25% from the list of comparables for the computation of ALP. Similar view has been taken by the Tribunal in the other decisions. We further note that the Hon'ble High Court in the case of Rampgreen Solutions (P.) Ltd. (supra) has also decided this issue in favour of the assessee. Accordingly, we direct the AO to exclude this company from the list of comparable. 8.8 Wipro Ltd. (seg.) The learned AR of the assessee submitted that this company is an industry leader and also owns tangibles. He has further submitted that the company is engaged in product development and services. However, the segmental information is not available. He has pointed out that there is a amalgamation during the year. He has relied upon the decision of co-ordinate bench of this Tribunal in case of 3DPLM Software Solution Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny cannot be considered as a comparable to the assessee. We, therefore, direct the Assessing Officer (TPO) to omit this company from the set of comparable companies in the case on hand for the year under consideration. 17.3 As it was found that this company owns Intellectual Property Rights in the form of registered patents and several pending applications for grant of patents. Therefore, the said company owning intangibles cannot be compared to low-risk captive services provider. Following the finding of the co-ordinate bench of this Tribunal, we direct the AO/TPO to exclude this company from the list of comparables. Accordingly, we direct the AO/TPO to re-compute the ALP after exclusion of the above companies from the list of comparables. The assessee claims that mean margin of the comparable after exclusion of the above comes to around 17.85% which is within tolerance range of +/-5%. We direct the TPO to consider the claim of the assessee of granting the benefit of tolerance range +/-5% as raised in ground No. 3 of the concise grounds. 24. From the above paras of this order rendered in the case of M/s Flextronics Tech. India(P)Ltd. (Supra), it is seen th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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