TMI Blog2016 (11) TMI 1509X X X X Extracts X X X X X X X X Extracts X X X X ..... 3) r.w.s. 144C of the Income Tax Act, 1961 (in short 'the Act') in pursuant to the directions of the Dispute Resolution Panel (in short DRP ) dt.30.09.2010 for the Assessment Year 2006-07. 2. The assessee is a company registered as a software technology park under STP, Govt. of India. The assessee has entered into an agreement for transcription service with its Associated Enterprise ( AE ) Acusis LLC, USA which is the second stage of holding company. Thus the services provided by the assessee are in the nature of Information Technology Enabled Services. The TPO selected 13 comparable companies for determination of Arm s Length Price ( ALP ) as under : Thus the TPO has worked out the adjusted Arithmetic Mean ( AM ) of comparable prices at 22.48% in comparison to 9.43% of assessee. The TPO has accordingly proposed an adjustment under Section 92CA of ₹ 2,27,83,360. The assessee has challenged the action of the TPO before the DRP but could not succeed. Sl. No. Particulars Margin (%) 1 Ace Software Exports Ltd. 7.72% 2 Allsec Tech ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Appellant on account of adjustment in the arm s length price of the medical transcription services transaction entered by the Appellant with its associated enterprise; 4. the learned AO/TPO erred in disregarding the economic analysis undertaken by the Appellant and conducting a fresh economic analysis for the determination of the arm s length price in connection with the impugned international transaction; 5. the learned AO/TPO have erred in ignoring the fact that since that Appellant is availing tax holiday u/s 10A of the Act, there is no intention to shift the profit base out of India, which is one of the basic intention of the introduction of transfer pricing provisions; 6. the learned AO/TPO erred in determining the arm s length margin/ price using only financial year 2005-06 data, which was not available to the Appellant at the time of complying with the transfer pricing documentation requirements; 7. the learned AO/TPO erred in rejecting certain comparables considered by the Appellant in the comparability analysis by applying different quantitative and qualitative filters; a) the learned AO/TPO erred in rejecting certain comparable compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prejudice to one another. The Appellant craves leave to add, alter, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon ble Tribunal to decide on the appeal in accordance with the law. 4. The assessee has also raised additional ground vide Petition under Rule 11 of ITAT for admission as under : 16) the learned TPO has erred in law and on facts by selecting the following companies as comparable which were functionally different from the Appellant; Vishal Information Technologies Limited. Maple eSolutions Limited. 17) The learned TPO has erred in law and on facts by selecting Asit C Mehta Financial Services Limited as comparable which was functionally different from the Appellant; 18) The learned TPO has erred in law and on facts by selecting Maple eSolutions Limited as comparable whose financial statements are not reliable for the relevant financial year. In the additional ground, the assessee is seeking exclusion of 3 comparable companies namely Vishal Information Technologies Ltd., Maple eSolutions Ltd. and Asti C Mehta Financ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices Ltd , we find that the functional comparability of this company has been examined by the co-ordinate bench of this Tribunal in the case of HSBC Electronic Data Processing India Ltd. Vs. ACIT (supra) as well as ITO Vs. CRM Services India Pvt. Ltd. (supra). Therefore prima facie we find that the functional comparability of these companies requires a serious consideration. Accordingly in view of the decision of Special Bench in the case of DCIT Vs. Quark Systems Ltd. (supra), we admit the additional grounds raised by the assessee. 8. Thus the assessee in this appeal is seeking exclusion of five companies form the list of comparables as under : i) Apex Knowledge Solutions Ltd. ii) Vishal Information Technologies Ltd. iii) Goldstone Infratech Ltd.(Seg.) iv) Maple eSolutions Ltd. v) Asit C Mehta Financial Services Ltd . We will deal with functional comparability of these five companies one by one as under : i) Apex Knowledge Solutions Ltd. 9.1 The learned Authorised Representative has submitted that this company is functionally not comparable as this company generated revenue from software exports amounting to ₹ 4.92 Crores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n assessee's own case for the Assessment Year 2007-08. 10.2 On the other hand, the ld. DR has relied upon the orders of authorities below. 10.3 Having considered the rival submissions as well the relevant material on record, at the outset we note that the co-ordinate bench of this Tribunal in assessee's own case for the Assessment Year 2007-08 has examined the comparability of this company decided and found that this company is operating on an outsource model and also having inventories therefore not functionally comparable. iii) Goldstone Infratech Ltd.(Seg) 11.1 The ld. AR of the assessee has submitted that this company fail the filter of 25% revenue from exports. He has relied upon to the details as well as the decision of this Tribunal in the case of HSBC Electronic Data Processing and submitted that the Tribunal has rejected this company by holding that the foreign currency earning was only ₹ 4.24 lakhs out of the total earning of BPO segment of ₹ 5.02 Crores and also the total turnover of ₹ 30.89 Crores. Therefore the revenue from export is less than 25% as a filter applied by the TPO. The ld. AR has submitted that the export revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earning in foreign currency at ₹ 4.24 lakh with the earnings of BPO at ₹ 5.02 crore or for that purpose of the entity as a whole at ₹ 30.89 crore, it becomes manifest that this case does not pass through the filter adopted by the TPO, being, the 'companies whose export revenues are more than 25% of the revenues'. Therefore, we are of the opinion, that this company cannot be considered as a comparable for the purpose of determining the ALP in this case. We direct the same to be excluded. We take note of the fact that as per the Schedule forming part of the accounts the total turnover of BPO Division of this company is ₹ 5.02 Crores whereas the foreign exchange earning is ₹ 4.24 lakhs. Therefore, the export revenue is less than 1% of turnover in the BPO segment and accordingly this company does not satisfy the filter of minimum 25% export revenue applied by the TPO. In view of the above facts as well as the decision of the co-ordinate bench, we direct the A.O./TPO to exclude this company form the set of comparables. iv) Maple eSolutions Ltd. 12.1 The learned Authorised Representative has submitted that financial statement of thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgin of these companies when there is no allegation of any malpractice or fraud in connection with the business of these companies. Further, considerable time has passed when these allegations were reported up till the AY under consideration. Therefore, solely on the basis of the allegations of fraud and malpractice against a person in respect of unconnected business activity because the said person happens to be the director of these companies, cannot render these companies as non-comparables. There is no allegation against these companies or business activity of these companies. Therefore, it cannot be considered that the business or results of these companies are in any manner influenced or affected by the allegation of fraud against the directors in respect of other business activity that too more than two decades back. 51.1 So far as the Maple Esolution Ltd ., is concerned, this company was selected by the assessee itself in TP study as comparable; therefore, we are not inclined to accept the objection raised by the assessee before us that the directors of these companies were involve din the fraud. 51.2 However, since Triton Corpn Ltd., acquired by Maple Esolution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computed correctly in the absence of the apportionment of the expenditure among the various segments. Further we find that there is an amalgamation during the year under consideration as reported in the Annual Report. The co-ordinate bench of Hyderabad in the case of HSBC Electronic Data Processing India Ltd. Vs. ACIT (supra) has examined this issue in paras 13 14 as under : 13. The last objection was with reference to the above company, which is on similar facts as that of Vishal Information Technologies, discussed above. It was submitted that this company is functionally different and fails under the employee cost filter. It was further submitted that there is a scheme of amalgamation of earlier company by the orders of the Hon'ble High Court of Judicature of Bombay, on 22.2.2006 and in view of amalgamation, the financials have changed and the business model also changed. Referring to the annual report placed on record, it was submitted that as against ₹ 24.02 lakhs of employee costs for the year ending 31st March, 2005, the employee cost has increased to ₹ 132.59 lakhs. Further, the data processing charges is also to the extent of ₹ 1.04 crores, whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his company has more than 26% RPT cannot be considered as good comparable. (ii) Mercary Outsourcing Management Ltd. 13.1 The learned Authorised Representative has submitted that the TPO has rejected this company on the similar reasoning of diminishing revenue and abnormal cost. 13.2 On the other hand, the learned DR has submitted that this company is incurring persistent losses and further the turnover of this company is less than ₹ 1 Crore and therefore it does not satisfy the filter of turnover applied by the TPO. 13.3 We have considered the rival submissions as well as the relevant material on record. At the outset, we note that turnover of this company in the ITES segment is only ₹ 45.33 lakhs which in any case does not satisfy any filter of turnover in comparison to the assessee's turnover of more than ₹ 27 Crores. Even if we apply the tolerance range of turnover of 10 times on both sides of the assessee's turnover then the company which is having less than ₹ 2.7 Crores of turnover will be outside the said range of 10 times. Accordingly, we are of the view that this company which is having only ₹ 45.33 lakhs turnover canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s accepted as a method of arriving at export profits. In the case of section 80HHC, the export profit is to be derived from the total business income of the assessee, whereas in section 10-A, the export profit is to be derived from the total business of the undertaking. Even in the case of business of an undertaking, it may include export business and domestic business, in other words, export turnover and domestic turnover. To the extent of export turnover, there would be a commonality between the numerator and the denominator of the formula. If the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. The reason being the total turnover includes export turnover. The components of the export turnover in the numerator and the denominator cannot be different. Therefore, though there is no definition of the term total turnover in section 10A, there is nothing in the said section to mandate that, what is excluded from the numerator that is export turnover would nevertheless form part of the denominator. When the statute prescribed a f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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