TMI Blog2017 (1) TMI 1570X X X X Extracts X X X X X X X X Extracts X X X X ..... - Held that:- As relying on Adaptec (India) P. Ltd. Versus The ACIT, Circle 1 (1) Hyderabad [2015 (6) TMI 288 - ITAT HYDERABAD] we direct the AO/TPO not to make negative working capital adjustment. Comparable selection criteria - Held that:- Assessee is engaged in rendering market research and related back office services for domestic and international clients thus companies functionally dissimilar with that of assessee need to be deselected from final list. Deduction u/s. 10A - denying deduction to the Offshore Research Service Centre (ORSC) unit by concluding that the ORSC unit has been formed by reconstruction of the existing business - Held that:- AO/TPO is directed to examine the issue in the light of the facts and if any un-availed portion was available for STPI unit, the deduction will be allowed. Accordingly, this issue is restored to the file of the AO to re-examine Disallowance of license fees - revenue or capital expenditure - Held that:- As relying on TNS India (P.) Ltd., v. Dy. CIT [2015 (5) TMI 45 - ITAT HYDERABAD] we uphold the direction of the DRP to treat the amount as 'capital in nature' to allow the depreciation. However, the rate of depreciation is to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e'. Consequent to the above directions of the DRP, AO has finalised the assessment order, in which the assessed income was determined at 29,55,15,904/-. Assessee is aggrieved on this order and raised as many as 22 grounds and one additional ground. In the course of present proceeding, assessee has placed on record that they do not wish to press Ground Nos. 6, 7, 9, 11, 12 14. 3. We have heard Ld. Counsel and Ld. DR in detail and perused the Paper Book placed on record. The ground-wise issues are decided as under: 4. Ground No. 1: Rejection of Transfer Pricing (TP) documentation maintained: Rejecting the TP documentation maintained by the Appellant in accordance with the provisions of the Act read with the Income Tax Rules, 1962 (Rules) and making an adjustment of ₹ 14,94,53,910 in relation to the following international transactions with its AEs. Provision of market research services and back-office processing services - ₹ 8,02,37,594; Payment of group overhead and regional overhead allocation costs - ₹ 4,39,80,890; and Payment of license fees - ₹ 2,52,35,426 4.1. This ground is with reference to treating the market ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g capital adjustment to the arithmetic mean of the companies selected; 8.1 This ground pertains to incorrect computation of working capital adjustment. It was submitted that working capital adjustment was wrongly considered by considering the total receivables and arrivals including third party transactions and making a negative working capital adjustment. AO/TPO is directed to examine this issue and work out the working capital adjustment afresh, as certain comparable companies are being considered separately. In case the working capital adjustment comes negative, AO/TPO is directed not to make any negative working capital adjustment as the same is not approved in various Co-ordinate Bench decisions. The Co-ordinate Bench of ITAT in the case of Adaptec (India) (P.) Ltd., v. Asstt. CIT [2015] 57 taxmann.com 307 (Hyd.-Trib), has decided the issue of negative working capital as under: '10. Ground No.8 pertains to the issue of negative working capital. As briefly stated above, after arriving at the arithmetic mean of all comparables at 22.03%, the A.O. worked out negative working capital adjustment of 3.22% thereby, making arms length price at 25.25%. Even though, DRP refus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt. In view of the same, the Panel directs that negative working capital adjustment to the arithmetic mean margin of the comparables shall not be made. In view of the above, the Panel directs that negative working capital adjustment to the arithmetic mean margin of the comparables shall not be made. 11. In view of the above, we are of the opinion that assessee's case being similar, there is no need for making any negative working capital adjustment when assessee does not carry any working capital risk. In fact, TPO should have done necessary working capital adjustment to the profits of the selected comparables so as to make them comparable to the assessee. In view of this, we direct the TPO not to make negative working capital adjustment'. 8.2 Respectfully following the decision of Co-ordinate Bench, we direct the AO/TPO not to make negative working capital adjustment. 9. Ground No. 8: Information obtained under section 133(6) Using information/documents which are not available in public domain by exercising powers under section (U/s) 133(6) of the Act; 9.1 This ground pertains to obtaining information u/s. 133(6) which was considered along with Ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 50.68% 16 Asit C Mehta Financial Services Ltd (Seg) 24.21% 17 Bodhtree Consulting Ltd (Seg) 29.58% 18 Eclerx Services Ltd 89.33% 19 HCL Comnet Systems Services Ltd (Seg) 44.99% 20 Informed Technologies India Ltd 35.56% 21 Infosys BPO Ltd 28.78% 22 Iservices India Pvt Ltd 49.47% 23 Mold Tek Technologies Ltd (Seg) 113.49% 24 Vishal Information Technologies Ltd 51.19% 25 Wipro Ltd (Seg) 29.70% 10.2 There is no objection with reference to comparables selected at items 1 to 13. The objection is with reference to comparables at 14 to 25. It was submitted that many of the comparables were already excluded by the decisions in HSBC Electro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Capital IQ Information Systems India Pvt. Ltd., Hyderabad v. DCIT (Int. Taxation), Hyderabad (ITA No.1961/Hyd/2011 dated 23.11.2012. 6.1.2 The learned departmental representative, on the other hand, submitted that there is no reason to exclude the aforesaid company as the TPO has given justifiable reasons for treating it as a comparable company. 6.1.3 We have heard the contentions of the parties with regard to the aforesaid company and perused the material on record. From the facts and material available on record, it is seen that two companies viz., Iridium Technologies and Geosoft Technologies amalgamated with M/s. Accentia Technologies Limited which resulted in a higher profit for the company during the year. In case of Capital IQ Information Systems India Pvt. Ltd., the co-ordinate bench of this Tribunal while considering the assessee's objection with regard to the aforesaid company held in the following manner:- 10. It is the submission of the assessee that this company cannot be treated as a comparable because of un-comparable financial results arising out of amalgamation in the company. In this regard, the assessee has relied upon the order of the DRP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r will have an effect on the profitability of the company in the financial year in which such event takes place. It is the contention of the assessee that in case of the aforesaid company, there is amalgamation in December, 2006, which has impacted the financial result. This fact has to be verified by the TPO. If it is found upon such verification that the amalgamation in fact has taken place, then the aforesaid comparable has to be excluded. 6.1.4 As can be seen from the order of the co-ordinate bench, the aforesaid company was excluded since ex-ordinary events like merger and demerger had taken during the relevant financial year which must have impacted the financial results of the company. That besides the high volume of on-site operation of Accentia Technologies Limited also makes it functionally dissimilar to the assessee. These facts are not considered either by the TPO or by the DRP. We therefore remit the matter to the file of the Assessing Officer who shall verify the fact whether merger has taken place during the year and if it found so, then the aforesaid company has to be excluded from the list of comparables. The Assessing Officer should also properly consider as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inclined to remit this issue to the file of the Assessing Officer who shall decide the acceptability or otherwise of the company as comparable after considering the assessee 's objections. 3. Asit C Mehta financial services Ltd. (Seg). 6.3.1. The learned authorised representative of the assessee objecting to the aforesaid company being selected as comparable submitted that the employee cost of the company is only 24.78% of its revenue compared to assessee's 56%. The learned authorised representative of the assessee further submitted that in many other cases for asst. year 2008-09 the DRP has excluded this company from the list of comparables. The learned authorised representative of the assessee also relied upon the decisions of Income-tax Appellate Tribunal, Hyderabad Bench in assessee's own case ITA.No.1624/Hyd/10 and S.A.No.210/Hyd/2012 dated 28.06.2013, Avineon India P. Ltd., ITA.No.1989/Hyd/2011 dated 31.10.2013 and Zavata India P. Ltd., Hyderabad v. DCIT, Circle 3(3), Hyderabad ITA.No.1781/Hyd/2011 dated 07.06.2013. 6.3.2 The learned Departmental Representative, on the other hand, supported the orders of the revenue authorities. 6.3.3 We have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roviding data analytics, operations management and audit reconciliation. It was submitted that besides being functionally different from the assessee, the aforesaid company has shown extraordinarily high profit at 88.11% hence cannot be treated as comparable. In support of such contention, the learned authorised representative of the assessee relied upon the decisions of Co-ordinate Bench of Hyderabad Tribunal in cases of Avineon India P. Ltd., ITA.No.1989/Hyd/2011 dated 31.10.2013, Zavata India P. Ltd., Hyderabad v. DCIT, Circle 3(3), Hyderabad ITA.No.1781/Hyd/2011 dated 07.06.2013, M/s. Capital IQ Information Systems India Pvt. Ltd., Hyderabad v. DCIT (Int.Taxation), Hyderabad (ITA No.1961/Hyd/2011 dated 23.11.2012 and also Special Bench decision of the Mumbai Tribunal in the case of Maersk Global Centres (India) P. Ltd., Mumbai v. ACIT, Circle 6(3), Mumbai dated 07.03.2014. 6.5.2 The learned departmental representative however supported the orders of the revenue authorities with regard to the aforesaid company. 6.5.3 We have heard rival submissions of the parties and perused the material on record. It is seen that in case of Capital IQ Information Systems (supra), the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... objection either before the TPO or before the DRP in respect of aforesaid companies. However neither the TPO nor DRP has examined why this year the company has exceptional profits. Whether due to mergers or any events or happenings the profit was exceptional require verification. The assessee has also not made any objection before the authorities. Hence, we are of the view that these two companies are to be reexamined by TPO/AO before being selected as comparables. TPO/AO is directed to consider the objections of assessee and decide the issue afresh. 10. Mold-Tek Technologies Limited:- 6.7.1 Objecting to the aforesaid company being treated as comparable, the learned authorised representative of the assessee submitted that during the year, the company has shown super normal profit of 117.29% compared to the assessee as well as other comparable companies. It was further submitted that apart from having extraordinarily high profit Mold- Tek is also functionally different as it is engaged in providing structural engineering consulting services under the KPO division. It was submitted that M/s Mold Tek is providing highly technical and specialised engineering services and use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eva India Pvt. Ltd. (supra) has observed that companies showing supernormal profit cannot be treated as comparable. The relevant observations of the Tribunal in that case are extracted hereunder for convenience 32. We have heard the arguments of both the sides and also perused the relevant material on record. It is observed that although a detail submission was made on behalf of the assessee before the learned CIT(A) on the basis of FAR analysis to show that the selection of M/s. Vimta Labs as comparable is not justified, the learned CIT(A) has not accepted the stand of the assessee on the issue without giving any cogent or convincing reasons. In its recent decision rendered in the case of Adobe Systems India Pvt. Ltd. (ITA No.5043/Del/2000 dtd. 21.01.2011) + (2011-TII-13-ITAT-DEL-TP), Delhi Bench of ITAT has held that exclusion of comparables showing supernormal profits as compared to other comparable is fully justified. We, therefore set aside the impugned order of the ld. CIT(A) on this issue and restore the matter to the file of the A.O. with a direction to decide the same afresh after taking into consideration the submissions made by the assessee before the learned CIT(A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oresaid company held in the following manner :- 17. After considering the submissions of the learned Authorised Representative for the assessee, we find that the DRP, in the proceedings for the assessment year 2008-09 in assessee's own case, after taking note of the composition of the vendor payments of Coral Hub for the last three years, and the fact that it has also commenced a new line of business of Printing on Demand(POD), wherein it prints upon clients request, concluded as follows- 18.4. In view of this major difference in functionality and the business model, this Panel is of the view that 'Coral Hub' is not a suitable comparable to the taxpayer and hence needs to be dropped form the final list of comparables. In case of ACIT v. M/s. Maersk Global service Centre (supra), the ITAT Mumbai Bench has also directed for exclusion of the aforesaid company, by observing in the following manner- Insofar as the cases of tulsyan Technologies Limited and Vishal Information Technologies Limited are concerned, it is noticed from their annual accounts that these companies outsourced a considerable portion of their business. As the assessee carried out e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd perused the material on record. It is not disputed that these three companies are having huge turnovers like that of assessee during the year. Therefore turnover filter as considered in other cases does not apply here. However as submitted the functional profile of companies as such is different. But, if the BPO division is similar to assessee the same can be considered after proper FAR analysis. Therefore we are of the opinion that TPO/AO can reconsider the comparables after giving due opportunity to assess and fairly analyzing its objections. In case the data (segmental or unit) is incomplete or functional profile etc are different AO/TPO should exclude the same. With these observations the issue of selection of these companies as comparables is restored to TPO/AO to do the needful. 7. In ground no 10 assessee is seeking adjustment for differences in functions and risks undertaken. With reference to the risk adjustment, it was the submission of the assessee that assessee functioned under a limited risk environment with most of the risks being assumed by its AEs and comparables selected for analysis include companies which have fairly diversified areas of specialisation, b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oes not have any marketing activities, a 35% adjustment is warranted for the difference in risks. It also submits that risk adjustment can also be computed under the Capital Asset Pricing Model (CAPM)/Sharpe Model for risk adjustments. In the previous year also matter was restored to TPO/AO in assessee own case. Since the application of the above decisions and facts herein are to be examined vis- -vis the assessee's business model, we, without giving any direction with reference to the risk adjustment and amount of risk adjustment required, restore the matter to the file of the Assessing Officer to re-examine this adjustment issue afresh, after considering the assessee's submissions and decide the issue in accordance with the principles on the subject.' 10.4. Since the above comparables were already considered in the Co-ordinate Bench decision, we direct the AO/TPO to examine the inclusion of items at 15, 20 and 22 as directed above in the above case and exclude the other comparables listed at 14, 16 to 19, 21, 23 to 25. We direct accordingly. 11. Ground No. 13: Adjustment for risk differences Not adjusting the net margins of the comparable companies taking i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the appeals are pending on the issue. 13.2. Ld. Counsel while stating that ORSC unit has come up afresh in Financial Year 2004 and claimed the deduction for the first time in AY. 2006-07, however, submitted that the AO in AY. 2008-09 has passed a detailed order u/s. 154 stating that ORSC unit which is not eligible for deduction as the eligibility u/s. 10A has got expired by AY. 2004-05 itself and the deduction in AY. 2008-09 was not allowable to assessee. The issue is being contested. It was submitted that assessee was eligible for deduction on the new ORSC unit which was approved as STPI and therefore, the claim is entirely different than that of earlier one. 13.3. Ld. DR referring to the order of the ITAT in TNS India (P.) Ltd. v. Addl. CIT [2014] 48 taxmann.com 80 (Hyd.-Trib.) submitted that ITAT has given finding that ORSC is not a new unit but is eligible for un- allowed portion of the deduction u/s. 10A which was an alternate contention of assessee. 13.4. We have considered the rival contentions and perused the order on record. As far as the unit of ORSC is concerned in TNS India (P.) Ltd. (supra) has held as under: '8. We have heard the parties and perused ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9: Capitalisation of license fees Disallowance the license fees of ₹ 34,23,815 by considering the same capital in nature 14.1 This ground pertains to the disallowance of license fees of ₹ 34,23,815/- by considering the same as capital in nature. 14.2 It was submitted that this issue is covered by the directions of the ITAT in the case of TNS India (P.) Ltd., v. Dy. CIT [2015] 57 taxmann.com 165 (Hyd.-Trib.) vide paras 21 to 23. The decision of the Co-ordinate Bench is as under: 21. The issue raised in ground No. 17 is with regard to treating the software licence fee paid as capital expenditure and allowing depreciation @ 25%. 22. Briefly the facts are, during the assessment proceeding, AO noticed that in the profit loss a/c, assessee has debited an amount of ₹ 2,21,29,855 towards computer maintenance charges. From the break-up submitted by assessee, it was noticed by AO that assessee has claimed an amount of ₹ 1,00,99,916 on account of licence fee. AO asked assessee to explain why the expenditure claimed should not be disallowed as it is in the nature of capital expenditure. Though assessee objected to such view of AO, but, AO rejecting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er. Therefore, expenditure incurred for acquiring such asset will be capital expenditure. However, we accept ld. AR's alternative contention that depreciation should be allowed at 60%. As per the new appendix applicable from AY 2006-07, depreciation on computer and computer software is to be allowed at 60%. As AO has not brought any material on record to show that computer software acquired by assessee is not in the nature of software as mentioned in the appendix, in our view, AO is not justified in allowing depreciation at 25%. We, therefore, direct AO to allow depreciation on the computer software at 60%. This ground is partly allowed. In view of the above, we direct AO to allow depreciation @ 60% on the software licence fee. This ground is partly allowed . 14.3 In view of that, we uphold the direction of the DRP to treat the amount as 'capital in nature' to allow the depreciation. However, the rate of depreciation is to be determined at 60%. With the above directions, the ground is considered partly allowed. 15. Ground No. 20: Adjustment of refund Adjusting an amount of ₹ 51,96,176 being refund issued u/s. 143(1) in the order while computing the ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
