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DCIT, Circle-17 (1) , New Delhi Versus M/s. Vertex Customer Services India (P) Limited

2017 (11) TMI 385 - ITAT DELHI

TPA - selection of comparable - selection criteria - Held that:- Assessee is engaged in providing services in the field of customer relationship management, managing call Centre and Information Technology (IT) enabled services to its Associated Enterprises (AEs). The assessee has provided the services from its undertaking registered with Software Technology Parks of India (STPI), thus companies functionally dissimilar with that of assessee need to be added to final list of comparable. - Cons .....

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inion, following the rule of consistency, we agree with the finding of the learned CIT-(A) that the additional revenue in question needs to be included in for computing PLI of the year under consideration. However, whether the additional revenue fee received pertains to IT enabled services i.e. relevant international transaction, has not been examined by the lower authorities, thus, we feel it appropriate to restore the issue to the file of the AO/TPO for verifying the facts and decide the issue .....

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the Commissioner of Income-tax (Appeals)-XXIX, New Delhi [in short the CIT-(A) ] for assessment year 2005-06 raising following grounds: 1. On the facts and in the circumstances of the case, Ld. CIT(A) erred in directing the TPO to delete Ultramine and Pigments Ltd. from the final set of comparables whereas whether the margin is high or low is not the indicator of comparability and the comparable was selected by the taxpayer itself after function, Assets and Risk (FAR) analysis and agreed by the .....

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7 and which was served through Departmental Representative, however, on the date of hearing neither the assessee appeared nor any Authorized Representative of the assessee attended. No written submission was either filed by the assessee. We also note from the record that on earlier occasions notice for hearing was sent through registered ports as well as served through Departmental Representative but no compliance was made on behalf of the assessee. It is evident that the assessee is not interes .....

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n providing services in the field of customer relationship management, managing call Centre and Information Technology (IT) enabled services to its Associated Enterprises (AEs). The assessee has provided the services from its undertaking registered with Software Technology Parks of India (STPI). The assessee filed return of income for the year under consideration on 29/10/2005 declaring total income of ₹ 93,21,290/-. The case was selected for scrutiny and notice under section 143(2) of the .....

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r claiming deduction under section 80G of the Act, amounting to ₹ 1,32,000/- total taxable income was arrived at ₹ 1,02,56,880/-. In assessment proceeding, the Assessing Officer noticed following international transactions with its AEs: S. No. Description of the transactions Amount (Rs.) 1. Provision of IT Enabled back services to the AEs 946,818,348 2. Receipt of Call Centre Support Services 102,575,273 3. Receipt of Technical Counseltancy Services 18,815,642 4. Cost Recharges 21,08 .....

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lying the operating profit/total cost ( OP/TC ) as the Profit Level Indicator ( PLI ). The assessee selected set of 22 comparables companies and based on average of three years data i.e. financial years 2002-03, 2003-04 and 2004-05 of these 22 selected comparable companies, the average OP/TC margin was determined at 11.60%. Further, in view of the claim of capacity utilization adjustment, the assessee computed its OP/TC at 13.80%. Further, the assessee mentioned that it re-negotiated its commerc .....

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d pertaining to the period under consideration and also after making adjustment for excess capacity. It was mentioned by the assessee that this profit margin being more than arm s length margin of 11.06% earned by the comparables, the international transactions with its AEs were at arm s length. 3.3 The ld. TPO rejected the claim of adjustment for not utilization of excess capacity and claim of working capital adjustment. The ld. TPO also excluded the additional service fee amount of ₹ 10, .....

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onsideration. Using this methodology, the learned TPO arrived at an average OP/TC margin at 14.77% for the revised set of comparables and proceeded to make TP adjustment amounting to ₹ 5,60,42,063/-. 3.4 After following the procedure laid down in the Act, the Assessing Officer passed the final assessment order on 19/12/2008 assessing the total income at ₹ 6,62,98,943/-. 3.5 Aggrieved, the assessee filed appeal before the Ld. CIT-(A), who partly allowed the appeal of the assessee. Agg .....

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2002-03 Segmental Profitability margins 86.94% 155.79% 69.91% 16.78% 4.2 The finding of Ld. CIT-(A) directing exclusion of the Ultramine & Pigments Ltd. is extracted as under: The contention raised by the appellant has been duly considered. Various judicial decisions have held that a company cannot be excluded from being comparable simply on the ground that it has abnormal profit margin so long as it satisfies comparability analysis. However, in present case, the appellant has given the wor .....

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s allowed. 5. Before us, the ld. Sr. DR submitted that Hon ble Delhi High Court in the case of Chryscapital Investment Advisors India (P) Ltd. Vs. Deputy Commissioner of Income Tax in ITA 417/2014, in decision pronounced on 27/04/2015, held that merely on the ground that an entity makes highly/extremely high profits/losses does not, ipso facto, lead to its exclusion from the list of comparables. He further submitted that the learned CIT-(A) was not correct in holding that the said comparable was .....

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earlier years? 2) Whether comparables can be rejected on the ground that they have exceptionally high profit margins as compared to the assessee in transfer pricing analysis? 3) Whether factors like differential functional and risk profile coupled with high degree of volatility in operating profit margins is sufficient ground to reject comparables for transfer pricing analysis? 4) Whether disallowances can be made under Section 36(1)(ii) when the bonus paid to shareholders is not in the exact pr .....

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r 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. b. While determining the comparability of transactions, multiple year data can only be included in the manner provided in Rule ITA 417/2014 Page 52 10B(4). As a general rule, it is not open to the assessee to rely upon previous year‟s data. c. As regards Khandwala Securities and Brescon, the matter is remitted to .....

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hich are capable of elimination has to be carried out. d. The deduction claimed by the assessee under Section 36(1)(ii) of the Act, in respect of the bonuses paid to its shareholderemployees is allowed. 8. We find that the in the instant case the assessee has not been able to find out any material difference between the assessee and said entity as far as functions carried out, assets employed and risk taken, i.e., FAR and, therefore, respectfully following the finding of the Hon ble Delhi High C .....

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2006-07, but claimed as pertaining to financial year under consideration) for computing PLI of the assessee for the year under consideration. The Ld. CIT-(A) has adjudicated the issue in dispute as under: 38.1 I have duly considered submissions of the appellant. The case of the appellant is that it has received additional remuneration of ₹ 102,667,942 from its AEs pertaining to the period under consideration but received and declared in income tax return in FY 2006-07. The appellant has s .....

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e appellant. 38.2 I find force in contention of the appellant that additional revenue received during FY 2006-07 pertains to period under consideration and it has been mentioned so in financials of FY 2006- 07. The appellant did not consider it while computing profit margin for FY 2006-07. By following matching principle, this additional revenue needs to be included for computing PLI of FY under consideration. This approach has been accepted by DRP for the subsequent AY under similar facts and c .....

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