TMI Blog2016 (11) TMI 1566X X X X Extracts X X X X X X X X Extracts X X X X ..... are that the assessee is a company incorporated under the Companies Act, 1956. It is a wholly owned subsidiary of M/s. Acusis Holding Company Ltd., British Virgin Islands, which in turn is a wholly owned subsidiary of Acusis LLC, USA. It is engaged in the business of providing medical transcription services falling within the category of information technology enabled services [ ITES ] to its AEs i.e., Acusis LLC, USA. 3. The return of income for the assessment year 2004-05 was filed on 27.10.2004 declaring income of Nil under the normal provisions of Act. Against the said return of income, the case was selected for scrutiny by issuing notice under section 143(2) of the Act. The assessee company also reported the international transactions with its AE of Provision of medical transcription services at ₹ 10,93,59,573/-. 4. The assessee company sought to justify the consideration received for the above international transactions entered with its AE to be at arm s length price. The assessee company also submitted a transfer pricing study report adopting the operating profit to total cost as a profit level indicator for the transfer pricing study. The assessee company app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 48.32% Arithmetic Mean 3.12% 6. The assessing officer after noticing above international transactions, referred the matter to the Transfer Pricing Officer (TPO). The TPO, by order dated 20.12.2006, passed under section 92CA(3) of Income Tax Act computed the transfer pricing adjustment at ₹ 2,35,24,271/-. The learned TPO accepted the TNMM adopted by the assessee company but rejected the transfer pricing report. Then the TPO proceeded to identify the different set of comparables for the purpose of determining ALP. While doing so, the TPO had applied the following filters: i. Use of contemporaneous data ii. Companies which are showing diminishing revenue are excluded. iii. Companies that have substantial underutilisation of assets were excluded. iv. Companies having persistent losses are excluded. v. Companies whose financial information not on the public domain are excluded. vi. Companies having export earnings less than 25% of total revenue are excluded. 7. The TPO has rejected all comparables selected by the assessee company in the TP study and introduced 9 new compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he PLIs of the comparables comes to 31% of cost. The ALP of the services rendered by the taxpayer is computed @31% of the cost as under: Operating Cost A ₹ 101438125/- Arm's Length Margin B 31% Arms Length Price of the services @31% of Arm's Length Margin C=Ax(100+B) ₹ 13,28,83,944/- 11.6 Adjustment to Income u/s. 92CA The margin earned by the taxpayer falls substantially short of the margin earned by comparable enterprises or the arm's length margin. This necessitates the following adjustment: Arms Length Price of the services A ₹ 13,28,83,944/- Price charged by you B ₹ 10,93,59,673/- Adjustment u/s. 92CA C=A-B ₹ 2,35,24,271/- 9. The assessing officer passed the assessment order dated 26.12.2006 u/s. 143(3) incorporating the above adjustments and also disallowing the claim u/s 10A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the purpose of computing margins. Being aggrieved by that part of the assessment order, the assessee company is in appeal before us raising the following grounds of appeal in ITA No. 442/B/2011: 13. The assessee company raised the following grounds of appeal : 1. The order of the learned Assessing Officer is based on incorrect interpretation of law and therefore is bad in law. 2. The learned Assessing Officer has erred, in law by making a reference to the learned Transfer Pricing Officer without meeting the preconditions for such reference under Section 92CA of the Act. Based on the facts and circumstances of the case, there was neither necessity nor expediency for such reference as there was no attempt on the part of the Appellant to wilfully understate the value of its international transaction. Further, no opportunity was provided by the learned Assessing Officer to the Appellant before referring the transfer pricing issues to the learned Transfer Pricing Officer. 3. The learned Transfer Pricing Officer and the learned Assessing Officer have erred, in law and in facts, by not accepting the economic analysis undertaken by the Appellant in accordance with the provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er Pricing Officer has failed to accept that the Rules, for analysing comparability requires one to look into the functions performed, risks assumed and assets employed by a particular company in order to judge its comparability and these factors do not change depending upon whether the services are provided locally or to overseas customers. 9. The learned Transfer Pricing Officer and the learned Assessing officer have erred, in law and in facts, by rejecting certain comparable companies identified by the Appellant using comparability criterion such as underutilisation of assets incorrectly determined and applied. While the learned Transfer Pricing Officer has mentioned that a loss due to underutilisation of the assets is not an industrial factor, the learned Transfer Pricing Officer has failed to accept that these are business/market risks faced by independent service providers. 10. The learned Transfer Pricing Officer and the learned Assessing officer have erred, in law and in facts, by rejecting the comparable companies identified by the Appellant on the grounds that the losses are on account of internal issues of the Company. The TPO has failed to accept that factors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred, in law, and in facts, in assessing/computing the total income as ₹ 23,597,598 and the total net tax payable as ₹ 11,248,545. 18. The learned Assessing Officer erred, in law, and in facts, in levying interest of ₹ 2,789,071 under section 234B of the Act. 19. The learned Assessing Officer erred, in law, and in facts, by initiating penalty proceedings under section 271(l)(c) of the Act without recording adequate justification and without concluding that the Appellant has concealed particulars of income or has furnished inaccurate particulars or has not acted in good faith and has not exercised due diligence. 14. Ground No. 1 is general in nature and do not require any adjudication. Ground Nos. 2 to 12 challenges the selection of comparables. The learned AR vehemently contended the following comparables cannot be included in the list of comparables: i. M/s. Tricom India Limited ii. M/s. Wipro BPO Limited The learned AR had pleaded for inclusion of the following companies in the list of comparables: i. M/s. Allsec Technologies Limited ii. M/s. Mercury Outsourcing Limited iii. M/s. Mapro Industries Limited iv. M/s. Cosmic Global Limi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) M/s. Wipro BPO Ltd: The learned AR contends that this company cannot be compared with that of assessee company as it is functionally dissimilar having high brand value, goodwill and high turnover. The learned AR has placed reliance on the following decisions: a. 24/7 Customer.Com Pvt. Ltd., b. Market Tools Research Private Limited c. Deloitte Consulting India Pvt. Ltd., d. Maersk Global Service Center (India) P. Ltd., Vs. ACIT On the other hand, the learned DR placed reliance on the orders of the lower authorities. It is undisputed fact that the company Wipro BPO Ltd., is having high brand value, goodwill with high turnover. Now it is trite law that the company having high brand value and intangibles cannot be compared with a company rendering purely ITES services. And in this regard, reliance can be placed on the following decisions: (a) Genisys Integratingn Systems (India) (P.) Ltd., Vs. Dy. CIT [2012] 20 taxmann.com 715/53 SOT 159 (Bang.-Trib.) (b) Kodiak Networks (India) (P.) Ltd, V. Asstt. CIT [2012] 18 taxmann.com 32/51 SOT 191 (Bang.- Trib.) (c) Telcordia Technologies India (P.) Ltd., V. Asstt. CIT [2012] 22 taxmann.com 96/137 IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparables. v) M/s. Mapro Industries Limited: The assessee company had pleaded for inclusion of this company as functionally comparable with the assessee company. He further submitted that the company made profit in the financial year 2001-02. It is only in the financial year 2002-03, 2003-04 the company incurred losses on account of under utilization of resources. Thus according to the assesse company, this company is not a persistent loss company. Normal loss making company cannot be excluded following the law laid down by special bench in Quark Systems Pvt. Ltd. We heard the rival submissions. As held by us in the para supra that a comparable cannot be excluded only because it is making losses. It cannot be said that this company was persistently incurring losses and therefore this company cannot be excluded from the list of comparables. We place reliance on the following 2 decisions: i) Technimount ICB (P.) Ltd. V. Asstt. CIT [2011] 11 taxmann.com 49 (mum.) ii) ITO V. CRM Services India (P.) Ltd., [2011] 14 taxmann.com 96/48 SOT 41 (RO) (Delhi-Trib.) Following the ratio laid down in the above cases, we direct the TPO/AO to include this company in the list of com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esent appeal raising the following grounds of appeal: 1. The order of the Learned CIT (Appeals), insofar as it is prejudicial to the interest of revenue, is opposed to law and the facts and circumstances of the case. 2. The learned CIT (Appeals) was not justified in allowing relief out of the adjustment of ₹ 2,35,24,271/- made by the Assessing Officer u/s. 92CA of the IT. Act, 1961 by directing the Assessing Officer to adopt the mean PLI of 33.418% as reduced by 5% i.e. 28.418% and adjustment towards foreign exchange gain, without appreciating the facts and circumstances under which the adjustment was made by the Assessing Officer based on the TPO's order. 3. The learned CIT (Appeals) was not justified in holding that the foreign exchange fluctuation gain need not be excluded while computing the operating margin of the assessee company for comparability analysis. 4. The learned CIT (Appeals) has failed to appreciate that the TP study is in respect of profits realized from international transactions of which the foreign exchange gain/loss does not form a part and therefore, the foreign exchange gain is not a part of the operating profits of the assessee company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... page 15 of the appellate order after deducting working capital adjustment of 2% as worked out by the TPO which was based on the 9 (nine) comparables selected by the TPO, whereas, the working capital adjustment was required to be recomputed in consequence of the CIT (Appeals) direction to exclude 7 (seven) of the comparables selected by the TPO. 12. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the CIT(A) be reversed insofar as the above mentioned issues ore concerned ond that of the Assessing Officer be restored. 13. The appellant craves leave to add, to alter, to amend or to delete any of the grounds that may be urged at the time of hearing of the appeal. 18. The revenue has raised 13 grounds of appeal. Ground No. 1, 12 13 are general in nature and do not require any adjudication. The ground No. 2, 3 4 challenge direction of the CIT(A) to include the foreign exchange fluctuation profit as a part of operating profit for the purpose of computing the margins. 19. The learned CIT(A) following the decision of the coordinate bench, Bangalore in the case of Sap Labs P. Ltd., held that the foreign exchange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Last ground of the assessee's appeal is against the rejection of benefit of 5% margin as prescribed in proviso to section 92C(2) in determining the Arm's Length Price (ALP) of its export transactions. Filtering out unnecessary details it is observed that the assessee's international transactions were referred to the TPO for determination of ALP. The TPO proposed adjustment of ₹ 19,23,948, for which addition was made by the A.O. It was argued before the ld. first appellate authority that the TPO ought to have allowed standard adjustment of 5% before making addition as per proviso to section 92C(2). The learned CIT(A) rejected this contention by holding that since the ALP exceeded the price declared by the assessee by more than 5%, the entire excess was liable to be added. It is this direction of the learned CIT(A) against which the assessee has come up in appeal before us. After considering the rival submissions and perusing the relevant material on record, we find that the dispute about the question as to whether plus minus 5% standard adjustment should be allowed while determining the ALP or the entire amount representing difference between ALP and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nate bench for the same assessment year in the case of 24/7 Customer.Com Pvt. Ltd., Vs. DCIT TS 708 ITAT 2012 (Bang. Trib) wherein it was held that the segmental results were available in the audited financial statements of said company. Hence, the coordinate bench found no reason to reject this company as a comparable. Therefore following the same reasoning, we uphold the inclusion of this company in the list of comparables. (ii) M/s. Vishal Information Technologies Limited: This company was rejected by CIT(A) on the ground of abnormal profits. The assessee company contended before us that this company is not comparable with that of assessee company as it significantly outsourced its services and very low employee cost, whereas the assessee company had carried out the entire operation by itself. The learned AR had placed reliance on the decision of coordinate bench in the case of 24/7 Customer.Com Pvt. Ltd., V. DCIT [2012] 28 taxmann.com 258 (Bang). 26. We heard the rival submission and perused the material on record. This company was considered by the coordinate bench in the case of 24/7 Customer.Com Pvt. Ltd., V. DCIT [2012] 28 taxmann.com 258 (Bang) wherein following th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith AE are at arm s length. The assessee company selected the following 12 comparables: Sl. No. Particulars 1 Ace Software Ltd. 2 Allsec Technologies Ltd. 3 Nucleus Netsoft GLS Ltd. 4 Transworks Information Services Ltd. 5 Vishal Information Technologies Ltd. 6 Fortune Infotech Ltd. 7 Mercury Outsourcing Management Ltd. 8 Spanco Telesystems and Solutions Ltd, 9 CMC Ltd. 10 CS Software Enterprise Ltd. 11 Compudyne Winfosystems Ltd. 12 Genesys International Corporation Ltd. 31. The AO, after noticing the above international ransactions referred the matter to the TPO. The TPO, by order dated 23.09.2008, passed under section 92CA of the act and computed Transfer Pricing adjustment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 19,93,519/- reducing from export turnover for the purpose of computing the deduction under section 10A of the income tax act. 35. Being aggrieved by the assessment order, appeal was filed before CIT(A)-IV, Bangalore, who vide consolidated order dated 21.1.2011 for the assessment year 2004-05 and 2005-06 had held that the high profit companies and the low margin companies cannot be considered as comparables following the law laid by the jurisdictional high court in Sap Labs Pvt. Ltd. Thus the following 3 companies were held to be uncomparable with that of assessee company: 1. Vishal Info Tech Ltd 2. Nucleus Net Soft and GIS Ltd 3. Transworks Information Service Ltd 36. The CIT(A) also held that in respect of telecommunication and internet charges incurred to the extent of ₹ 19,93,519/-, the same should be reduced from the total turnover as well as from export turnover and in respect of tolerance, the benefit of proviso to sub section (2) of 92CA, the CIT(A) held that the same should be allowed as a standard deduction. 37. The CIT(A) also held that the foreign exchange fluctuations gain/loss should be considered as operating profit. Being aggrieved ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion the ITAT decision in the case of Global Ventege (P.) Ltd. (supra). 9. The learned CIT (Appeals) has erred in relying on the CBDT Circular No. 5/2010 dated 03.06.2010 where it has been clarified that the second proviso to section 92C(2) was applicable for the assessment year 2009-10 onwards, which was subsequently modified by CBDT by way of a corrigendum dt. 30.9.2010. 10. The learned CIT (Appeals) has erred in directing the Assessing Officer to exclude 3 (three) comparable companies as being super profit making, cases and companies making profits at wide variance with the arithmetic mean of the PLI of the comparables, without appreciating the detailed reasons recorded in the TPO's order for the selection of such companies as functionally comparable companies following an elaborate search process and application of appropriate filters. 11. The learned CIT (Appeals) has erred in following the order of the ITAT, Bangalore Bench in the case of Sap Labs India (P.) Ltd. (supra) for the assessment year 2003-04 in ITA No. 398 and 418/Bang/2008 dated 30.08.2010 without examining the facts and circumstances of the assessee's case in detail and without appreciating that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue is already decided by us in favour of the assessee company in the assessment year 2004-05 in ITA No. 442/Bang/2011. Following the same, we dismiss this ground of appeal. 41. Ground Nos. 7, 8 and 9 challenges the direction of the learned CIT(A) to allow the benefit under proviso to sub section (2) of 92CA as standard deduction. This issue is already decided by us in the assessee s own case for the assessment year 2004-05 in favour of the revenue following the same reasoning we dismiss the ground of appeal filed by the revenue. Hence dismissed. 42. Ground Nos. 10, 11 and 12 challenges the orders of the CIT(A). The directions of the CIT(A) to delete the entities M/s. Vishal Info Tech Ltd, M/s. Nucleus Net Soft and GIS Ltd and M/s. Transworks Information Service Ltd for the reasons that the high profit making companies and low margin companies cannot be considered as comparables. This reasoning of CIT(A) was reversed by us in the assessee s own case in the assessment year 2004-05. However, the learned AR submitted that these companies needs to be excluded for the reasons of functionality differences, which we shall deal with each of them as follows: i. M/s. Vishal Info ..... X X X X Extracts X X X X X X X X Extracts X X X X
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