TMI Blog2017 (9) TMI 99X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee in interest of justice. Determination of functional profile of the assessee - high-end service provider or low-end service provider - Held that:- In view of the categorical finding of the co-ordinate Bench for the assessment year 2005- 06 based on the transfer pricing study report of the assessee itself now it is not possible to assume the functional profile of the assessee as low-end ITES provider. It is also not possible to ignore the findings of the co-ordinate Bench for the assessment year 2007-08 further the appeal before us is the assessment year 2006-07 which is in between the year of both the above years decided by the co-ordinate Bench. The two comparables objected by the assessee also cannot be directed for its exclusion without reaching at the correct functional profile of the assessee. Therefore, in the interest of justice and to dig out the correct functional profile of the assessee amidst host of confusion, we set aside the whole issue of transfer pricing adjustment back to the file of the learned Assessing Officer/Transfer Pricing Officer for ascertaining the correct functional profile of the assessee for this year without being influenced by the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bad in law and void ab initio. 2. That on the facts and in the circumstances of the case and in law, the reference made by the learned Assessing Officer suffers from the jurisdictional error as the learned Assessing Officer did not record any reasons in the draft assessment order based on which he reached the conclusion that it was 'expedient and necessary' to refer the matter to the learned Transfer Pricing Officer ('the TPO') for computation of the arm's length price, as is required under section 92CA(1) of the Income-tax Act, 1961 ('Act'). 3. That on the facts and in the circumstances of the case and in law, the learned Assessing Officer erred in making an addition of ₹ 16,24,01,920 to the returned income of the appellant by re-computing the arm's length price of the international transactions under section 92 of the Act. 4. That on the facts and in the circumstances of the case and in law, the learned Assessing Officer/learned Transfer Pricing Officer/learned Dispute Resolution Panel ('DRP') erred on facts and in law in deter mining the arm's length price of the international transactions of the assessee by : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant is a private limited company, being wholly owned subsidiary company of Eserve Value Limited, Bermuda, engaged in the business of provision of services in the field of information technology enabled services to its associated enterprises. It is also registered with software technology park as 100 per cent. export oriented unit and eligible to claim deduction under section 10A of the Income-tax Act. It is deriving income from its associated concern and has entered into international transactions. 4. The assessee filed its return of income on November 29, 2006 showing nil income and claiming deduction under section 10A of the Income-tax Act of ₹ 6.76 crores leaving the balance income from business of ₹ 17.32 lakhs and income from other sources of ₹ 1.33 lakhs which were set off against brought forward losses of the earlier years. Subsequently the return of the assessee was picked up for scrutiny and notice under section 143(2) of the Act was issued on October 15, 2007. During the course of assessment proceedings it was noted that the assessee has entered into international transaction of ₹ 59.92 crores and therefore he referred the matter to the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d business plans. Broadly, it provides services under following segments : (ii) Under the intellectual property segment, the services are provided for patents, drafting, prior art search, and intellectual property asset management. The assessee is in old in carrying out patent assessment, intellectual property research, and analysis, patent consulting, and preparing draft patent application to be filed overseas. This research is delivered overseas to associated enterprises, which is an arrangement with the team of lawyers for filing of the patent applications in the appropriate jurisdiction. It also offers intellectual property asset management and helps in analysing portfolio patents. It offers assistance on patent overlap infringement and in finding potential companies, which would be interested in licensing a particular invention. (iii) In its equity research and financial analysts segment. It focuses on global mutual fund and equities. It involves tricking the performance of specific stocks and mutual funds and analysing it. The background ties compiled and provided to the clients, which include mainly investment banks etc. This work is customised according to the require ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above adjustment with respect to the transfer pricing of ₹ 16,24,01,920 was made. The learned Assessing Officer was further of the view that the assessee has claimed deduction under section 10A of the Income-tax Act and thereafter claimed the set off of the brought forward business loss for the assessment year 2002-03 against the balance profits under the head. According to him, the manner of the computation is incorrect. According to him the brought forward losses have to be deducted first from the profits and gains of business and deduction under section 10A shall be granted only from the balance income under this head. Therefore against the returned income of Rs. nil. The total income of the assessee was computed at ₹ 16,25,35,780. 10. The assessee preferred objections before the learned Dispute Resolution Panel who issued direction dated July 28, 2010 rejected all the contention of the assessee and upheld the finding of the learned Assessing Officer/Transfer Pricing Officer. 11. Consequent to this on August 31, 2010. The learned Assessing Officer passed an assessment order under section 143(3) read with section 144C of the Income-tax Act determining the total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt for this ground and therefore we dismiss it. 17. Ground No. 3 of the appeal of the assessee is against the order of the learned Assessing Officer against the addition of ₹ 16,24,01,920 to the returned income of the appellant on account of the arm's length price of the international transactions under section 92 of the Income-tax Act. Ground No. 4 of the appeal of the assessee is contesting various issues with respect to the transfer pricing adjustment and ground No. 5 of the appeal of the assessee is with respect to the denial of the benefit of 5 per cent. margin under the proviso to section 92C(2) of the Income-tax Act. Therefore, as the ground Nos. 3, 4 and 5 are related to the transfer pricing adjustment they are taken together. 18. The assessee has also made a request for admission of additional ground of appeal vide application dated January 24, 2017. According to that, the assessee raised a legal ground based on the facts already on record for exclusion of two comparables namely, Vishal Information Technologies Ltd. and Alpha Geo (India) P. Ltd. It was submitted that though the transfer pricing adjustment has been contested in its totality the assessee woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. v. CIT [2015] 377 ITR 533 (Delhi) wherein it has been stated that Vishal Information Technologies Ltd. is a KPO and has discussed this comparable in detail and stated that it cannot be compared to companies engaged in low and services/back office enabled ITES support services. He further referred to the plethora of decisions wherein this comparable company has held to be engaged in KPO business. 21. With respect to Alpha Go India Limited, he submitted that this company is functionally not comparable because it is engaged in the business of exploration and production of oil. He further referred to the facts mentioned on the website of the company wherein it has been stated that it is engaged in providing seismic survey services to the oil and exploration, production, sector. The company provides various services including design and planning of 2-D and 3-D surveys, seismic data acquisition in 2-D and 3-D, seismic, data processing and reprocessing/special processing, seismic data interpretation, such as generation, evaluation and ranking of prospects, reservoir analysis. It is also offering topographic survey with GPS and Artie came, AIM transcription, digitalisation of art ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d IT enabled services. Therefore, it is comparable with the KPO and the decision cited by the learned authorised representative of the Delhi High Court in Rampgreen Solutions does not apply to the facts of the case. For the functional profile of the assessee, the learned Departmental representative submitted that the assessee is the creator of an industry worth billions of rupees and the company offers investment research that analytics technology research and business research services worldwide and is one of the hottest destinations for employment seekers. It is further submitted that in the website itself that Evalueserve is knowledge process outsourcing unit and it is a high- end knowledge oriented research and analytics industry and Eserve is Frontrunner. It is further mentioned that the company believes in offering on clinching focus towards the core sector of knowledge process outsourcing and this focus gives that the tag of industry leader and authority. He referred to the print out webbiest. In view of this, it was submitted that there is no reason that the assessee's functional profile should be looked at as low-end ITES provider. According to him in fact, it is a kno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rated that the comparable companies had more under utilisation of the labour force compared to the assessee. The onus to prove such under utilisation of the employees of the comparable for claiming adjustment squarely lies on the assessee. He further relied on the decision of the co-ordinate Bench in the case of i.e. ION Trading India (P.) Ltd. v. ITO (I. T. A. No.1035/Del/2015 dated December 7, 2015) wherein it has been held that no capacity utilisation adjustment can be made in the case of comparables in the case of us are captive service provider. As the assessee is also a captive service provider it cannot be granted the above adjustment. He further relied upon the decision of the court in it Bench in the case of FCI OEN Connectors Ltd. v. Asst. CIT (I.T.A. No. 70/Coch/2016) wherein it has been held that adjustment for under utilisation of capacity can be given only when the reasons for under utilisation are given by the assessee. Therefore, he vehemently objected to the claim of the assessee for granting adjustment and on account of capacity utilisation. 28. With respect to the working capital adjustment, it was submitted by him that the assessee is not claimed in its trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount to ₹ 17.15 crores which works out to 31.27 per cent of the total sales made by the Datamatics Technologies Ltd. The assessee submits as is the accepted transfer pricing practice in terms of O. E. C. D. guidelines, as also sanction by law in India, such transactions with the associated parties cannot be considered as uncontrolled transactions. It is also submitted that there is an arithmetical error on account of which operating expenses of ₹ 579 crores were not taken into account while aggregating total expenditure as a result of which the original profit to cost ratio worked out to 138.46 per cent. The assessee's contention is that the inclusion of this comparable, which takes into account profit on cost at 138.46 per cent. has vitiated the transfer pricing analyses. It is submitted that this mistake is an inadvertent mistake and in any event since the Commissioner of Income- tax (Appeals) had balance-sheet of the Data Matrix Technologies Ltd. before whom he ought to have been taken into account the correct position. Without prejudice to the argument that Datamatics Technologies Ltd., for the above reasons, should not be included as a comparable at all. The a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... employed or to be employed' and must be taken into consideration. Then sub-rule (2) of rule 10B requires application of FAR test for judging comparability of international transaction with uncontrolled transaction and is as under : 10B.(2) For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the taws and Government orders in force, costs of labour and capital in the mark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1971] 81 ITR 303 (Delhi), the Hon ble Delhi High Court observed as under (page 307) : It is true that the assessee itself had included that dividend income in is return for the year in question but there is no estoppel in the Income-tax Act and the assessee having itself challenged the validity of taxing the dividend during the year of assessment in question it must be taken that it had resiled from the position which it had wrongly taken while filing the return. Quit apart from it, it is incumbent on the Income-tax Department to find out whether a particular income was assessable in the particular year or not. Merely because the assessee wrongly included the income in its return for a particular year, it cannot confer jurisdiction on the department to tax that income in that year even though legally such income did not pertain to that year. 32. In the case of R. B. Jessa Ram Fateh Chand v. CIT [1971] 81 ITR 409 (All), it has been found and observed as under (page 412) : Mr. Brijlal Gupta appearing for the department pointed out that the assessee itself filed separate returns for the two parts of a single accounting period. The assessee applied for registration fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not taxable under the Act. We, therefore, reject this plea. 35. In paragraph 4.16 of latest report, the OECD provides the following guidelines : In practice, neither countries nor taxpayers should misuse the burden of proof in the manner described above. Because of the difficulties with transfer pricing analysis, it would be appropriate for both taxpayers and tax administrations to take special care and to use restraint in relying on the burden of proof in the course of the examination of a transfer pricing case. More particularly, as a matter of good practice the burden of proof should not be misused by tax administrations or taxpayers as a justification for making groundless or unverifiable assertions about transfer pricing. A tax administration should be prepared to make good faith showing that its determination of transfer pricing is consistent with the arm's length principle even where the burden of proof is on the taxpayer, and the taxpayers similarly should be prepared to make good faith showing that their transfer pricing is consistent with the arm's length principle regard less of where the burden of proof lies. 36. The aforesaid decisions and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvations and in accordance with the law. We direct the assessee to place all the relevant material before the Assessing Officer and/or Transfer Pricing Officer and fully co-operate in expeditious disposal of the matter in accordance with the law. The matter stands restored to the file of the Assessing Officer as such. (Extracted from taxmann.com, Underline supplied by us) 30. On perusing the above decision it is apparent that the assessee was allowed to resile from the comparable selected by it for the reason that (a) those were the initial years of transfer pricing assessments, (b) the assessee showed that related party transaction in the comparables case were 31 per cent. and (c) there was error in computation of margin of comparables. (d) further in that case the assessee resiled from that comparable before the Tribunal in 2009 where the appeal for the assessment year 2004- 05 was being heard. 31. However in the present case we are deciding the appeal of the assessee for the assessment year 2006-07 in 2017 i.e., after 11 years and the appeal of the assessee has already travelled once before the co-ordinate Bench and twice before the learned Dispute Resolution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee actually acts as support service provider. The learned counsel relied on the decision of the Hon ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. v. CIT (I. T. A. No. 102 of 2015 dated August 10, 2015) [2015] 377 ITR 533 (Delhi), wherein the Hon ble Delhi High Court has noted with reference to the decision of the Special Bench of the Tribunal in Maersk Global Centers (India) P. Ltd. v. Asst. CIT (I. T. A. No. 7466/Mum/2012) [2014] 31 ITR (Trib) 1 (Mumbai) [SB], that there might be a case where an entity may be rendering a mix of services, some of which may be functionally comparable to KPO while other services may not. In such case, classification of BPO and KPO may not be feasible. Accordingly, it was held that no straitjacket formula can be applied. Further, it was held that in case where the categorisation of services rendered cannot be defined with certainty, it would be apposite to employ the broad functionality test and then exclude uncontrolled entities, which were found to be materially dissimilar in aspects and features that have a bearing on the profitability of those entities. 39. It was further held that where the controlled transactions w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /2012) in paragraph Nos. 38 and 39 of that judgment and has held that the assessee is a low-end ITES provider. According to us those paragraphs of the order for the assessment year 2005-06 do not contain the finding about the functional profile of the assessee. The assessee has submitted at page No. 245 onwards of the paper book order of the learned Transfer Pricing Officer for the assessment year 2005-06 wherein at paragraph No. 2 the learned Transfer Pricing Officer has described the business description of the assessee and at paragraph No. 2.3 the assessee has mentioned the description of the assessee's business as under : The assessee is engaged in the business of providing high-end IT enables services to its associated enterprises. The company is registered with software technology of the Government of India. The assessee conducts research activities and provides knowledge management services to its associated enterprises. The above functional profile matches with the website information submitted by the learned Departmental representative (source : www.financewalk.com/work-evalueserve-jobs-review). Looking at the order of the learned Transfer Pricing Officer for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justification for claim of working capital adjustments or capacity utilisation for examination by the learned Assessing Officer/Transfer Pricing Officer. In the result ground Nos. 3, 4, 5 and additional ground are remitted back to the file of the learned Assessing Officer/Transfer Pricing Officer to decide the whole issue afresh and hence these grounds of appeal of the assessee are allowed with the above directions. 35. Ground No. 6 of the appeal of the assessee is against the issue whether deduction under section 10A of the Income-tax Act is allowable after setting of brought forward losses of the previous year, or before that. The assessee has claimed it before setting off brought forward losses of the earlier years. The learned Assessing Officer is of the view that forced the assessee should have set off brought forward losses from the assessment year 2002-03 of ₹ 95,08,868. The assessee relied upon the decision of the co-ordinate Bench which is pending for adjudication at that particular time before the Hon ble Delhi High Court. It was objected by the assessee before the learned Dispute Resolution Panel wide objection No. 7 which is rejected, therefore, in the final a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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