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TMI Blog2016 (6) TMI 1296X X X X Extracts X X X X X X X X Extracts X X X X ..... ithout demonstrating that appellant had motive of tax evasion. 5. Ignoring the fact that the members of Dispute Resolution Panel also being jurisdictional Commissioner/Directors of Income Tax of the appellant, the constitution of the Dispute Resolution Panel is bad in law. 6. not appreciating that the charging or computation provision relating to income under the head "Profits & Gains of Business or Profession" do not refer to or include the amounts computed under Chapter X' and therefore addition under Chapter X is bad in law. 7. adopting a flawed process of issuing notices u/s 133(6) and relying on the same without providing complete information and an opportunity to cross examine the companies concerned. 8. rejecting the comparables selected by the appellant and rejecting transfer pricing analysis of the appellant. 9. Performing fresh transfer pricing analysis and adopting inappropriate filters in doing fresh transfer pricing analysis. 10. selecting inappropriate comparables. 11. rejecting comparables proposed by the appellant. 12. inappropriately computing the operating margins of comparables and the appellant. 13. Treating foreign exchange gain or loss and provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by him. Further, the TPO applied RPT filter of 25% for selection of comparables. The TPO has selected the above 4 companies as comparables in the order passed u/s 92CA. The Appellant had selected Wipro Ltd as a comparable in its TP study. With respect to application of filters, the ground pertains to question of law. With respect to rejection of a comparable, the ground pertains to question of law and facts. All the necessary facts for adjudicating this ground are already on record. The Appellant humbly prays that the additional grounds be admitted and adjudicated along with the other grounds of appeal in the course of hearing of the appeal. The Appellant prays accordingly." 4. We have heard the learned Authorised Representative as well as learned Authorised Representative on admission of the additional grounds. The learned Authorised Representative of the assessee has submitted that though the assessee has challenged the action of the A.O./TPO as well as the directions of the DRP in respect of the comparables selected by the TPO/A.O. and consequently adjustments however in the light of various decisions of this Tribunal, the assessee is raising these additional grounds. This do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bjected to the admission of the additional ground raised by the assessee. 6. We have considered the rival submissions as well as the relevant material on record. By way of the additional grounds, the assessee is raising objection regarding the application of employee cost filter of 25% of the total cost, application of RP filter at 15% instead of 25% applied by the TPO and exclusion of four comparable companies which was considered by the TPO/A.O for determining the Arm's Length Price ('ALP') As regards the objection raised by the learned Departmental Representative that Wipro Ltd. (Seg.) was selected by the assessee in its T.P. Study, we are of the view that the assessee cannot be precluded from raising an objection against a company which is found to be not comparable even if the said company was wrongly selected by the assessee in its T.P. Study. This view was taken by the Special Bench of the ITAT, Chandigarh in the case of Quark Systems (P.) Ltd.(supra) in paras 30 and 38 as under : '"30. Learned special counsel for the Revenue Shri Kapila has vehemently argued that "Datamatics" was taken as one of the comparables by the taxpayer and no objection to its inclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jection to the inclusion of Datamatics as comparable has been raised now and not before Revenue authorities. Therefore, we deem it fit and proper to remit the matter to the file of the AO for consideration of claim of the taxpayer and make a de novo adjudication of the ALP after providing reasonable opportunity of being heard to the assessee. We order accordingly."' We note that the comparability of this company i.e. Wipro Ltd. (Seg.) has been examined by this Tribunal in a series of decisions and therefore when no fresh evidence, record or fact are required to be investigated then there is no bar in admitting the additional ground for adjudication of the issue of functional comparability of this company. Similarly, other three companies namely Accentia Technology Ltd. (Seg.), Asif C Mehta and Bodhtree Consultancy Ltd. (Seg.) the assessee has raised additional ground in view of the fact that the functional comparability of these companies have been examined by this Tribunal in a number of cases and on the basis of the finding of this Tribunal the assessee made out a good prima facie case for raising this objection against the inclusion of these companies in the set of comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransactions as under :- Nature of International transactions Amount (Rs.) Income from network admn. And technical support services. 16,80,79,426 Total amount of International transactions 16,80,79,426 Description IT Enabled Services (Rs.) Revenue 16,80,79,426 Operating Expenses 14,69,64,800 Operating Profit 2,11,14,626 Operating Profit onCost 14.36% Thus it is clear that the dispute is only with respect to the ITES provided by the assessee to its Associated Enterprises (AEs) have operating profit cost at 14.36%. To bench mark its international transactions, the assessee has selected 17 companies. The TPO rejected the T.P. Analysis of the assessee and also rejected the 12 companies out of 17 selected by the assessee. Thus the TPO accepted five companies selected by the assessee in its T.P. Study and after carrying out a fresh search added 20 more companies in the set of comparables. Subsequently the TPO has added 2 more companies and finally the TPO has considered 27 companies for determining the ALP as under : 1 Accentia Technologies Ltd (Seg.) 30.61% 27.38% 2 Aditya Birla Minacs Worldwide Ltd 11.98% 12.45% 3 Allsec Technologies Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing, the learned Authorised Representative of the assessee has submitted that an identical set of 27 comparables was involved in the case of Ariba Technologies India (P.) Ltd. v. ITO [2016] 67 taxmann.com 265 (Bang.-Trib) for the same assessment year which has been decided by this Tribunal vide order dt.2.2.2016. The learned Authorised Representative has pointed out that the functional comparability of the majority of the companies has been examined by the Tribunal in the said decision. Thus the learned Authorised Representative has relied upon the decision of this Tribunal in the case of Ariba Technologies India (P.) Ltd. (supra). so far as the functional comparability as well as the RPT filter at 15% should be applied instead of 25%. 7.4 The learned Departmental Representative has submitted that the decision of this Tribunal in the case of Ariba Technologies India (P.) Ltd. (supra) cannot be applied in toto in the case of the assessee as the business profile of the assessee is not identical to that of Ariba Technologies India (P.) Ltd. (supra). He has relied upon the orders of the authorities below and submitted that the TPO has examined the functional comparability of these com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x Knowledge Solution Ltd. : This company was selected by the TPO/A.O and the assessee did not contest the inclusion of this company in the list of comparables. Even before the CIT (Appeals) as well as before this Tribunal, the assessee has not contested against the inclusion of this company. The CIT (Appeals) has retained this company as a good comparable. Therefore no specific adjudication or finding was sought in respect of this company either by the assessee or by the revenue. (v) Apollo Health Street Ltd. : This company was selected by the TPO/A.O though the assessee did not contest the inclusion of this company either before the TPO/A.O or before the CIT (Appeals). However, the CIT (Appeals) excluded this company on turnover filter. We find that the RPT revenue of this company is 17.77%. Therefore this company fails RPT filter of 15% and accordingly, we upheld the exclusion of this company from the list of comparables. (vi) Asit C Mehta Financial Services Ltd. : This company was selected by the TPO/A.O though the assessee did not contest the inclusion of this company either before the TPO/A.O or before the CIT (Appeals). However, the CIT (Appeals) excluded this company on tu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herwise, the profit margin at 29.58% cannot be considered as an abnormal when the assessee itself has reported the margin at 19% which is modified to 18.66%. We further note that even in the case of Essential Technologies Ltd. the profit margin before working capital was considered at Rs. 30.61% and the assessee has accepted the said companyas a good comparable. Therefore, this objection of the assessee is without any merit or substance and deserves rejection. As regards the RPT at 38.54%, we find that the assessee raised this objection before the TPO/A.O and it has not been specifically dealt with by the authorities below. Further, from the Annual Report of this company, we find that the objection raised by the assessee pertains to the advances given by this company to the Associated Enterpries (AEs) and reported that the same was taken as RPT. The advance to the AEs does not pertain to the ITES segment and further it is not a operational trading activity of the said company to be considered as RPT for the purpose of uncontrolled comparable price. Accordingly, we do not find any merit in the objections of the assessee, even on the ground of RPT. (viii) Caliber Paint Business Solu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uded this company by applying 0% RPT filter. In view of our finding of proper RPT tolerance range at 15%, this company is restored back to the set of comparables having only 7.88% RPT. (xi) Eclerx Services Ltd. : This company was included by the TPO in the list of comparable. The assessee objected to this company on the ground of functional dis- similarity. The CIT (Appeals) has excluded this company on the ground of RPT that this company is having only 9.12% RPT. Therefore in view of our finding on RPT filter, the comparability of this company has to be decided on basis of functional similarity or dis- similarity. The ld. AR submitted that this company is rendering services like engineering, designing services which requires highly skilled employees. Thus, this company cannot be selected as comparable because their functions are different. He has relied upon the decision of Special Bench of Mumbai Tribunal in the case of Maersk Global Centres (India ) (P) Ltd v ACIT 147 ITD 83 and submitted that this company is rendering highly skilled services and cannot be compared with the service of ITES and accordingly, this company should be deleted from the set of comparables On the othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h-end services involving specialized knowledge and domain expertise in the field and the same cannot be compared with the assessee company which is mainly engaged in providing low-end services to the group concerns. 83. For the reasons given above, we are of the view that if the functions actually performed by the assessee company for its AEs are compared with the functional profile of M/s eClerx Services Pvt.Ltd. and Mold-Tec Technologies Ltd., it is difficult to find out any relatively equal degree of comparability and the said entities cannot be taken as comparables for the purpose of determining ALP of the transactions of the assessee company with its AEs. We, therefore, direct that these two entities be excluded from the list of 10 comparables finally taken by the AO/TPO as per the direction of the DRP." As discussed by the Special Bench in the case of Maersk Global Centres (India ) (P) Ltd (supra), this company provides data analysis and data process solution and is recognised as experts in chosen market financial services, retail and manufacturing. It was found to have being providing complete business solutions. The nature and different field of services provided by this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filter. In view of our finding of proper RPT tolerance range this company having 5.84% RPT is restored back to the set of comparables. (xiv) HCL Comnet : This company was selected by the TPO/A.O though the assessee did not contest the inclusion of this company either before the TPO/A.O or before the CIT (Appeals). However, the CIT (Appeals) excluded this company on RPT filter. We find that the RPT revenue of this company is 21.52%. Therefore this company fails RPT filter of 15% and accordingly, we upheld the exclusion of this company from the list of comparables. (xv) I C R A Techno Analytics Ltd. (Seg.) : This company was selected by the TPO/A.O but was not objected by the assessee either before the TPO/A.O or before the CIT(A) even not before this Tribunal. However, the CIT (Appeals) excluded this company by applying 0% RPT filter. In view of our finding of proper RPT tolerance range this company having RPT at 1.85% is restored back to the set of comparables. (xvi) Informed Technologies Ltd. : This company was selected by the TPO/A.O and the assessee did not contest the inclusion of this company either before the TPO/A.O or before the CIT (Appeals). However, the CIT (Appeals) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Turnover Witness Systems Software India Pvt Ltd (AY : 2007-08) ITA No. 1366/Bang/2011. FOR CASES INVOLVING JOINTOPERATION, LARGE INTANGIBLES,HIGH BRAND VALUE, RISK BEARING& HIGH PROFIT MARGIN CASES Agnity India Technologies Pvt Ltd ITA No. 3856(Del)/2010], ITAT Delhi" This ruling has been upheld by the High Court (ITA No. 1204/2011, dated July 2013). Scale of operation, brand value etc. NTT Data India Enterprise Application Services Pvt. Ltd. [ITA No. 1612/Hyd/2010.] Motorola India Electronics Private Limited vs. ACIT ITA No. 1274 & 1413/Bang/2008. Logica Pvt. Ltd. Vs ACIT (ITA No. 1129/Bang/2011 On the other hand, the learned Departmental Representative has relied upon the orders of the TPO and submitted that when this company is in the business of ITES then it is functionally comparable with that of the assessee. The assessee did not object the inclusion of this company in the list of comparables before the TPO. We have considered the rival submissions as well as the relevant material on record. The contention of the ld. A.R. of the Assessee is that if at all this company is considered as a comparable then the segmental marg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. Neither the TPO nor the DRP have noticed that there is bound to be a difference between the Assessee and Megasoft and the profit arising to the Megasoft as a result of the existence of the software product segment and no finding has been given that reasonably accurate adjustments can be made to eliminate the material effects of such differences. For this reason, we are inclined to hold that the profit margin of 23.11% which is the margin of the software service segment be taken for comparability. In view of the above conclusion, we do not wish to go into the question as to whether less than 25% of the revenues of the comparable are from software products and therefore the comparable satisfied TPO's filter of more than 75% of revenues from software development services. Thus it was found that this company is functionally dis-similar to the ITES serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso super normal growth of 200% in this segment. In support of his contention, he has relied upon the following decisions :- Cases Pertaining to Asst. Year Market Tools Research Pvt. Ltd. (ITA No. 2066/Hyd/2011. Capital IQ Information Systems (India) Pvt Ltd. Knoah Solutions Pvt Ltd (ITA No.1407/Hyd/2013 On the other hand, the learned Departmental Representative has submitted that this company is in ITES and the CIT (Appeals) has excluded this company by holding that this company is a KPO and not a BPO. However, mere nomenclature of KPO and BPO cannot be a ground for inclusion or exclusion of a company in this list of comparables without examining the actual functions performed by the company. We have heard the rival submissions and the relevant material on record. We find that this company is providing highly technica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this company before the CIT (Appeals). However, the CIT (Appeals) has retained this company in the list of comparables. Before us, the learned Authorised Representative of the assessee has submitted that this company is functionally dissimilar to the assessee as this company is engaged in providing services by way of outsourcing services to the third party vendors. He has referred the relevant part of the Annual Report and submitted that the job work expenditure is significant which shows that this company is outsourcing the services to third party and therefore this company cannot be considered as a good comparable. The learned Authorised Representative has further pointed out that for the Assessment Year 2006-07, this Tribunal has held that this company cannot be considered as a good comparable. He has also relied upon the decisions as under : Zavata India Private Limited (ITA No. 1781/Hyd/2011, TS-156-ITAT-2013(HYD)-TP, ITAT Hyderabad) Capital IQ Information Systems (India) Pvt Ltd-ITA No 1961-AY ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith reference to the following five companies- (a) Vishal Information Technologies Ltd. (b) Goldstone Infratech Ltd. (c) Datamatic Financial Services Ltd.(seg) (d) Maple e-Solutions Ltd. (e) Nucleus Netsoft & GIS(India) Ltd. (now known as (Asit C. Mehta Financial Services Ltd.) Vishal Information Technologies Ltd. 9. The assessee's objection with reference to inclusion of this comparable is on the reason that the company is functionally different, also does not satisfy the filters such as employee cost and on-site revenue filter. It was submitted that employee cost forms a major portion of the total cost of BPO services and in the assessee's case employee cost is 62% of the total cost, whereas in the selected company the employee cost is less than 2%, which indicates that most of the work was outsourced and the out-sourcing cost was at 88.64% of the operating cost. It was further submitted that the ITAT Bangalore in the case of First Advantage Off-shore Services (ITA No.1252/Bang/2010) has directed to use employee turnover filter in a consistent manner for selection of comparables and in the case of Maersk Global Services Centre (India) Pvt. Ltd. (14 ITR(Trib) 541) t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Hyderbad Bench of ITAT, we direct the TPO to exclude the aforesaid companies from the list of comparable while arriving at the arithmetic mean of comparable. The relevant grounds of appeal of the Assessee are allowed." In view of the above facts as well as the decision of the Tribunal in assessee's own case for Assessment Year 2006-07, we direct the A.O/TPO to exclude this company form the list of comparables. (xxv) Wipro Limited (Seg.) : This company was selected by the TPO and included in the list of comparables. The assessee objected the inclusion of this company on the ground of functional dis-similarity. The CIT (Appeals) excluded this company on 0% RPT filter as well as functional dis-similarity. Before us, the learned Authorised Representative of the assessee submitted that this company cannot be compared with the assessee as it has made significant investment in the business acquisition. He has referred the relevant part of the Annual Report and submitted that this company has reported a huge investment in acquisition of the business. This company is also engaged in the business of innovation, technology innovation, process innovation and delivery innovation. It al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of this company. The CIT (Appeals) has retained this company as a good comparable. Therefore no specific adjudication or finding was sought in respect of this company either by the assessee or by the revenue. (xxvii) Accurate Data Converters Ltd. : : This company was selected by the TPO/A.O and assessee did not contest the inclusion of this company in the list of comparables. Even before the CIT (Appeals) as well as before this Tribunal, the assessee has not contested against the inclusion of this company. The CIT (Appeals) has retained this company as a good comparable. Therefore no specific adjudication or finding was sought in respect of this company either by the assessee or by the revenue.' Thus it is clear that certain companies were found as not comparable are directed to be excluded on functional dis-similarity, RPT as well as different business model or having extra- ordinary event : (i) Apollo Healthstreet Ltd. (ii) Asit C Mehta Financial Services. These two companies were found as not good comparables on the ground of RPT filter @ 15%. 8. Bodhtree Consultancy Ltd. 8.1 The learned Authorised Representative of the assessee submitted that this company is engage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clients." Thus it is clear that this company is having one segment namely software development under which this company is providing software solutions including open and end-to-end web solution, software consultancy, design and development of solution. Further, the company is also providing data cleansing and software development. These services are in the category of software development services and not in ITES. Accordingly, we are of the view that the software development segment cannot be compared with ITES segment and hence this company cannot be compared with the assessee's ITES segment. Accordingly, we direct the A.O./TPO to exclude this company from the list of comparables. 9. e-clerx Services Ltd. We have considered the rival submissions and the relevant material on record. At the outset, we note that the comparability of this company has been considered by the co- ordinate bench of this Tribunal in the case of Ariba Technologies India (P.) Ltd. (supra). From the finding of the co-ordinate bench it is clear that the comparability of this company was also considered by the Special Bench of the Tribunal in the case of Maersk Global Centres (India) (P.) Ltd. v. Asstt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n record. At the outset we note that the TPO in para 33.18 of the impugned order has stated that the Annual Report was not available for the year under consideration. Thus the notice under Section 133(6) was issued to the company. The company made available its Annual Report to the TPO and on the basis of the information received under Section 133(6), the TPO has concluded that this company is comparable with the assessee. The co-ordinate bench of this Tribunal in the case of e4e Business Solutions India (P.) Ltd. (supra) has considered this issue in para 30 as under : " 30. The assessee has not raised any specific ground on adopting this company as a comparable before the DRP. Before us, the learned counsel for the assessee has submitted that the TPO did not furnish the information obtained from this company in exercise of his powers u/s.133(6) of the Act. It was further pointed out that even as per the TPO, the annual report of this company for F. Y. 2006-07 was not available. The TPO has gone by the data available on capita line data base. The learned counsel for the assessee therefore made a prayer that the question of considering the aforesaid company as a comparable should b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iary namely Geo Soft Technologies Ltd. and Iridium Technologies India Pvt. Ltd. w.e.f. 1.4.2006 as per the respective orders of the Hon'ble High Court. He has further submitted that this fact has also been mentioned in the notes to accounts. Thus the learned Authorised Representative has submitted that due to the extra-ordinary event during the year under consideration, this company cannot be considered as good comparable. The learned Authorised Representative has relied upon the decision dt.29.4.2016 of Delhi Bench of ITAT in the case of Sony Mobile Communications International AB Ltd. v. Dy. DIT [2016] 69 taxmann.com 404 in support of his contention. 13.2 On the other hand, the learned Departmental Representative has submitted that the assessee has not raised this issue before the authorities below. Further it is not clear whether the amalgamation of the subsidiaries has changed business profile of this company from its stand alone. He has relied upon the orders of the authorities below. 13.3 We have considered the rival submissions and the relevant material on record. At the outset we note that as per the Directors Report of this company, there was an amalgamation of its t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity of such a company. It is relevant to highlight that we are considering the exclusion of a company on this score. In our considered opinion, when other comparables are available, the exclusion of a probable comparable company cannot have much significance in contrast to a situation of inclusion of a probable incomparable. Respectfully following the above referred decisions, we hold that TCS Ltd. cannot be considered as comparable with the assessee. The same is directed to be excluded." Therefore, for limited purpose of considering the said record, we set aside this issue to the record of A.O/TPO and then decide the issue of comparability of this company in the light of the above observations. 14. Vishal Information Technology Ltd. We have considered the rival submissions as well as the relevant material on record. At the outset, we note that the comparability of this company has been examined by this Tribunal in the case of Ariba Technologies India (P.)Ltd. (supra) and it was found that this company was out sourcing its job and therefore it fails the employee cost filter. Even otherwise when this is getting its work done through-out sourcing then the business model of this c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration and the composite data has been considered. In view of the above facts brought to our notice, we set aside this issue to the record of the TPO/A.O for further verification and examination of the relevant record and financial data of this company. We make it clear that if this company is generating revenue from software development activity which is part of the operating revenue / margins of this company considered for the purpose of ALP then this company shall be excluded from the set of comparables. 17. As we have directed the A.O./TPO to exclude certain companies and to examine the comparability, some of the companies therefore after exclusion and reconsideration of the companies as directed in this order, the ALP from the remaining comparable companies as directed to be recomputed. Needless to say the benefit of second proviso to Section 92C(2) of the Act also be considered. 18. Ground No.17 is regarding calculation of deduction under Section 10A after setting off brought forward losses and unabsorbed depreciation. 18.1 The learned Authorised Representative of the assessee has submitted that this issue is covered by the judgment of Hon'ble jurisdictional Hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h of the assessing authority was quite contrary to the aforesaid statutory provisions and the appellate Commissioner as we l as the Tribunal were fully justified in setting aside the said assessment order and granting the benefit of section 10A to be assessee. Hence, the main substantial question of law is answered in favour of the assessees and against the revenue". 9.4.2 The Hon'ble High Court of Karnataka in its aforesaid decision (supra), has held that deduction under Section 10A of the Act is to be given without setting off the unabsorbed brought forward losses. In the case on hand, the Assessing Officer has computed the eligible deduction under Section 10A of the Act after setting off brought forward unabsorbed business losses. Respectfully following the decision of the Hon'ble High Court of Karnataka in the case of Yokogawa India Ltd. (supra), we direct the Assessing Officer to allow the deduction under Section 10A of the Act without setting off the brought forward unabsorbed business loses. Consequently, Ground No.14 raised by the assessee is allowed." We further note that the Hon'ble jurisdictional High Court in the case of Wipro Ltd. (supra) has again decide ..... X X X X Extracts X X X X X X X X Extracts X X X X
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