TMI Blog2016 (8) TMI 1321X X X X Extracts X X X X X X X X Extracts X X X X ..... ty has to be maintained by considering the gain or loss on account of foreign exchange fluctuation in the cases of comparable also. Benefit of second proviso to sec. 92C for considering the tolerance range of + 5% - Held that:- The benefit of the proviso is available if the price of the international transaction of the assessee is within the tolerance limit of + 5% of the comparable price determined by the TPO. Accordingly, we direct the AO/TPO to consider the benefit of proviso to sec. 92C if the price of the assessee is within the tolerance range as provided in the said proviso. - IT (TP) APPEAL NO. 1227 (BANG.) OF 2010 - - - Dated:- 11-8-2016 - VIJAYPAL RAO, JUDICIAL MEMBER, AND INTURI RAMA RAO, ACCOUNTANT MEMBER For the Appellant : P.K. Prasad and V.M. Ashankur, CA. For the Respondent : P. Chandrashekar, CIT. ORDER Vijaypal Rao, Judicial Member This appeal by the assessee is directed against the asst. order dated 7/9/2010. passed u/s 143(3) r.w.s 144C of the Income-tax Act in pursuant to the directions of DRP dated 30/8/2010 for the asst. year 2006-07. 2. The assessee has filed following concise grounds:- The AO in pursuance of the directi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law and on facts by not including foreign exchange fluctuations/loss and provisions written' back as part of the operating income; SPECIFIC (COMPARABLE SPECIFIC) 9. The AO in pursuance of the directions of the DRP erred in law and on facts by upholding the inclusion of the following comparables for the stated reasons therein as part of the final list of comparables for the purposes of comparability analysis to determine the ALP of the International Transaction and to determine the Arithmetic mean of mark up on cost of comparable companies vis-a-vis that of the Tested Party's Margin - i. Asit C Mehta Financial Services Ltd. even though the same should have been excluded as comparable on the ground of being functionally dissimilar with different business models and with extra ordinary events like amalgamation. (Additional Ground filed separately as this comparable was part of assessee 's own set of comparables); ii. Maple e Solution Ltd. even though the same should have been excluded as comparable on the ground of its data being unreliable. (Additional Ground filed separately as this comparable was not contested before lower authorities for exclusion out o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section IOA is a beneficial section. It is intended to provide incentives to promote exports. The incentive is to exempt profits relatable to exports. In the case of combined business of an assessee, having export business and domestic business, the Legislature intended to have a formula to ascertain the profits from export business by apportioning the total profits of the business on the basis of turnovers. Apportionment on the basis of turnover was 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 IOA, 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. The export turnover would be a component or part of a denominator, the other component being the domestic turnover. In other words to the extent of export turnover, there would be a commonality between the numerator and the denominator of the formula. In view of the commonality, the understanding should also be the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted by the Tribunal in following the judgments rendered I the context of section 80HHC in interpreting section 10A when the principle underlying both these provisions is one and the same. Therefore, we do not see any merit in these appeals. The substantial question of law framed is answered in favour of the assessee and against the Revenue. 3. The case of the Revenue is that the same should be excluded from the export turnover but should not be excluded from total turnover. On this issue, the judgment of Hon'ble Karnataka High Court rendered in the case of Tata Elxsi Ltd. (supra) supports the case of the assessee because in this case, it was held by Hon'ble Karnataka High Court that the total turnover is sum total of export turnover and domestic turnover and, therefore, if an amount is excluded from export turnover, the total turnover is also reduced by the same amount as a consequences of deduction from export turnover. In this view of the matter, we direct the AO to exclude the above expenses from total turnover as well while computing the deduction u/s 10A of IT Act. 4. Respectfully following the judgment of Hon'ble Jurisdictional High Court, we allow this g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Amount (INR) Remarks 1. Provision of back office support services ₹ 165,423,578/- Adjustment done by the TPO 2. Purchase of fixed assets ₹ 11,822,667/- No adjustment done 3 Reimbursement of expenses paid ₹ 46,375,732/- No adjustment done 4. Reimbursement of expenses received ₹ 1,577,926/- No adjustment done 14. The assessee has bench marked its ITES services provided to its AE by selecting 14 comparable companies and by adopting TNMM as most appropriate method with average OP/TC as PLI of 14.56%. Thus, the assessee claimed its international transactions having operating margin at 12.31% at arms length price in comparison to arithmetic mean margin. Mean margin of the comparable at 14.56% is computed as under:- SN Comparable Company Without Adjs. % Markup on Total Cost 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nformation Technologies Ltd. 25.64 48.03 0 48.03 7 Asit C Mehta Financial Services Ltd (Earlier known as Nucleus Netsoft GIS (India) Ltd., 5.68 31.52 0 34.52 8 Goldstone Infratech Ltd. (Seg.) (Earlier known as Goldstone Teleservices Ltd) 5.03 29.01 0 29.01 9 Spanco Ltd (Scg.) (Earlier known as Spanco Telesystems Solutions Ltd.,) 82.32 20.86 0 20.86 10 Ace Software Exports Ltd. 4.97 7.72 0 7.72 11 Apex Knowledge Solutions Pvt. Ltd., 4.92 20.48 0 20.48 12 R Systems International Ltd (Seg.) 9.17 15.11 0.01 15.24 13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al in a number of cases and it was found that these companies cannot be considered as functionally comparable with the ITES provider. He has relied upon various decisions including the decision of this Tribunal wherein the comparability of these company has been examined. The learned Authorized Representative has also relied upon the decision of the Special Bench of ITAT, Chandigarh in the case of Dy. CIT v. Quark Systems Ltd. [2010] 38 SOT 307 and submitted that even if the assessee has taken a particular company as comparable in the TP study, the assessee is entitled to point out before this Tribunal that the said enterprise has wrongly been taken as comparable. 21. On the other hand, the learned Departmental Representative has submitted that when the assessee selected these companies as comparables in the TP study, the assessee cannot be permitted to raise the objections against the comparability of those companies. He has further submitted that if the objections raised by the assessee is accepted then it will reverse the entire process of determination of ALP conducted by the TPO. He has further contended that neither the assessee nor the TPO has applied any employee cost fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal that above enterprise has wrongly been taken as comparable. In fact there are vast differences between tested party and the Datamatics. The case of Datamatics is like that of Imercius Technologies representing extreme positions. If Imercius Technologies has suffered heavy losses and, therefore, it is not treated as comparable by the tax authorities, they also have to consider that the Datamatics has earned extraordinary profit and has a huge turnover, besides differences in assets and other characteristics referred to by Shri Aggarwal. The Tribunal is a fact-finding body and, therefore, has to take into account all the relevant material and determine the question as per the statutory regulations. 38 Accordingly, on facts and circumstances of the case, we hold that taxpayer is not estopped from pointing out that Datamatics has wrongly been taken as comparable. While admitting additional ground of appeal raised by the assessee to require us to consider whether or not Datamatics should be included in the comparable, we make no comments on merit except observing that assessee from record has shown its prima facie case. Further claim may be examined by the AO. This course ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee took us through the Annual accounts of Datamatics Financial Services Limited, and submitted that the gross income of this company for the year ending on 31.03.2006 was at ₹ 2.31 crore as against total expenses of ₹ 1.84 crore. Referring to pages 319 and 320 of the paper book, our attention was drawn towards Annexure-2 to demonstrate that the Transactions with the Associated Parties within the meaning of sections 92A and 92B of the Income-tax Act, 1961 showed one major transaction with Datamatics Limited towards 'Reimbursement of expenses' at ₹ 99.14 lakh. The learned AR contended that the transactions of Datamatics Financial Services Limited with other AEs amounted to ₹ 14.31 lakh making total of transactions with the AEs at ₹ 1.13 crore. It was submitted that the percentage of transaction with related parties is much more than 25%, being, the filter adopted by the TPO himself and hence the same should be excluded. 12. In the opposition, the learned Departmental Representative contended that the major transaction of ₹ 99.14 lakh of Datamatics Financial Services Limited with Datamatics Limited was towards 'Reimbursement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... called comparable case of Datamatics Financial Services Limited was included by the TPO in the final list of comparables, in our considered opinion, the same is liable to be excluded as it involves related party transactions at much higher level, as against the filter adopted by the TPO himself, being companies with less than 25% related party transactions. We order accordingly. In view of the above, since this company fails in this filter adopted by the TPO, we direct the TPO to exclude this company from the list of comparables adopted. 28. As it is clear that the coordinate bench has taken the view that for the purpose of considering the related party transactions, the definition of international transactions within the meaning of sec. 92B are to be considered. By following the earlier decision of the co-ordinate bench, we direct the AO/TPO to exclude this company from the set of comparable. Maple e-Solutions Ltd.:- 29. The learned AR of the assessee has submitted that the comparability of this company has been examined by this tribunal in the case of Goldman Sachs Services (P.) Ltd. (supra) and therefore, this company cannot be considered as comparable. In suppor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see's own case and it was found that this company cannot be rejected as comparable on the alleged objections of involvement of directors of this company in alleged fraud. By following the order of this tribunal in assessee's own case, we decide this issue against the assessee and in favour of the Revenue. I. Vishal Information Technologies Ltd., 33. The learned AR of the assessee submitted that this company fails the employee filter as the cost of the employee is less than 2% of the total cost, therefore, this company is out sourcing its business activity for which the out sourcing cost is 88.64% of the total cost. In support of his contention he has relied upon the decision of the co-ordinate bench in the case of Goldman Sachs Services (P.) Ltd. (supra). 34. On the other hand learned DR has submitted that when the TPO has not applied any filer as employee cost than this objection cannot be considered as relevant factor for exclusion of this company in the list of comparable. II. Asit C Mehta Financial Services Ltd., 35. The learned AR of the assessee submitted that this company functionally is not comparable with the assessee as it has outsourcing a signific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO has used the information obtained u/s. 133(6) and found that this company is functionally comparable with the assessee then in the absence of any vertical considered in the same segment either by the assessee or TPO these objections raised by the assessee cannot be accepted. 41. We have considered the rival submissions as well as relevant material on record. At the outset we note that the comparability of these 4 companies has been examined by the co-ordinate bench of this tribunal in case of Goldman Sachs Services (P.) Ltd. (supra) in para 13.4.1 to 14.3.2 as under:- '13.4.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial pronouncement relied on by the assessee. We find that the co-ordinate bench of this Tribunal in the case of Ariba Technologies India Pvt. Ltd. (supra) after considering the comparability of the above five companies to companies rendering ITES to its AEs as in the assessee in the case on hand, has excluded them from the list of comparables holding a under at paras 24 and 25 of its order:- 24. We have considered the rival submissions. As far as comparable companies chosen by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e (name changed to Coral Hub Ltd.), vide para 18 of the order, wherein ultimately, it was decided that there is major difference in functionality and the business model and the DRP Bench was of the view that Coral Hub (formerly known as Vishal Information Technology Ltd.) was not a suitable comparable and needs to be dropped from the final set of comparables. Based on the above submissions, it was submitted that this company cannot be used as a comparable and has to be excluded. 9.1 The learned Departmental Representative, however relied on the orders of the TPO. 9.2 After considering the rival contentions, we find considerable force in the contentions advanced by the learned counsel. There is no dispute with reference to the fact that most of the cost incurred by the company taken as comparable is outsourcing cost, as can be seen from the Annual report placed in the paper-book and ITAT, Mumbai in the case of Maersk Global Service Centre (supra) has analysed and rejected this company as comparable, due to the reason that it has outsourced a considerable portion of its business and it is functionally different. This factor was also approved by the DRP in assessee's own cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Datamatic Financial Services Ltd. 11. The assessee's objection to inclusion of this comparable is on the basis of Related Party Transactions filter. It was submitted that RPT exceeds 25% of the sales and therefore, to be excluded. The assessee relied on the decision of the coordinate Bench of the Tribunal (Mumbai Bench) in the case of Stream International Services (supra), wherein, wherein with reference to this comparable company, it was held as under: 11. The first is M/s. Datamatics Financial Services Limited. It can be observed that the TPO applied filter of Companies with less than 25% related party transactions . The learned Counsel for the assessee took us through the Annual accounts of Datamatics Financial Services Limited, and submitted that the gross income of this company for the year ending on 31.03.2006 was at ₹ 2.31 crore as against total expenses of ₹ 1.84 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontention of the Id. DR that the reimbursement of expenses not involving profit element should not be construed as a transaction, is taken to a logical conclusion, it would mean that all such dealings will cease to be transactions for the purposes of Chapter-X of the Act. Once these dealings are not considered as 'transactions', these will also cease to be international transactions, going out of the purview of section 92 itself. Obviously, such a view point is contrary to the clear intention and the language of the relevant provisions. A pure reimbursement of expenses by one AE to another AE is very much a 'transaction' as per section 92F(v) and consequently is equally an international transaction as per section 92B requiring consideration as per section 92 of the Act. Be that as it may, the learned Departmental Representative could not demonstrate the fact that such reimbursement of expenses was without any markup. As the so called comparable case of Datamatics Financial Services Limited was included by the TPO in the final list of comparables, in our considered opinion, the same is liable to be excluded as it involves related party transactions at much higher lev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, which indicates that the assessee is outsourcing the work. Accordingly, it cannot be selected as a comparable. Due to amalgamation during the year, the assessee's business model has changed and because of employee cost filter also, this comparable has to be excluded. 13.1 After considering the rival submissions, we are of the opinion that this company cannot be selected as a comparable not only on the reason of failing employee cost filter, but also due to amalgamation during the year, which has changed the business model of the company. 14. In view of the foregoing discussion, we agree with the assessee's objection that the above five comparabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inate bench has held as under:- 26. The learned counsel further submitted that the comparable company chosen by the TPO viz., Apex Knowledge Solution Pvt. Ltd., should be excluded from the list of comparable companies chosen by the TPO. In this regard our attention was drawn to the decision of the ITAT Bangalore Bench in the case of Google India Pvt. Ltd. v. DCIT ITA No. l368/Bang/2010 (AY 06-07) order dated 19.10.2012. 27. We have considered the submission of the learned counsel for the Assessee. We find that in the case of Google India Pvt. Ltd. (supra), this tribunal in the case of TP adjustment in IT enabled services segment of an Assessee for AY 06-07 considered the comparability of the company Ms. Apex Knowledge Solution Pvt. Ltd. in the IT Enabled Services segment. The tribunal in para-16 of its order held that the said company is not functional comparable as it provides services such as E-publishing knowledge based services etc. In view of the above, we direct the TPO to exclude the aforesaid company also from the final list of comparable companies for the purpose of determining the ALP. 14.3.2 Following the aforesaid decision of the co-ordinate bench of this Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dge based services etc. cannot be considered as comparable with the ITP services/BPO services provider company. Accordingly, following the earlier order of this tribunal, we direct the AO/TPO to exclude this company from the list of comparables. 44. Accordingly in view of the above discussion as well as decision of the coordinate bench of this tribunal in case of Goldman Sachs Services (P.) Ltd. (supra), we direct the AO to exclude these 4 companies from the list of comparables. 45. The next grievance of the assessee is that the TPO has not considered foreign exchange gain as part of the operating profit. 46. We have heard learned AR as well as learned DR. and considered relevant material on record. The learned AR has relied upon the decision of the co-ordinate bench of this tribunal in the case of SAP Labs India (P.) Ltd. v. Asstt. CIT [2011] 44 SOT 156 (Bang.). 47. On the other hand learned DR has relied upon the orders of the authorities below. 48. Having considered the rival submissions, we are of the considered view that the foreign exchange gain or loss arising from the export turnover realization would be part of the operating profit of the assessee as well as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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