TMI Blog2018 (5) TMI 1739X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed and directed to exclude various comparables in the ITS and Marketing segment, we deem it fit to direct the TPO to recomputed the ALP on all three segments after giving due adjustments to the working capital as determined by the ld. CIT(A) with respect to the comparables remaining after excluding comparables indicated hereinabove. - ITA No. 5926/DEL/2010 & ITA No. 1843/DEL/2010 - - - Dated:- 11-5-2018 - SHRI R.S.SYAL, VICE PRESIDENT, AND SHRI LALIET KUMAR, JUDICIAL MEMBER Assessee by : Dr. Shashwat Bajpai,Adv, Shri Sharad Agarwal, Adv Department by : Shri Kumar Pranav, Sr. DR ORDER PER LALIET KUMAR, JM:- The above two appeals filed by the assessee are directed against two separate orders of the ld. CIT(A)-XX, New Delhi dated 22.01.2014 for A.Y 2007-08 and order of the DRP dated 24.09.2010 for A.Y 2006-07. Since both the appeals pertain to same assessee and were heard together, these are being disposed of by this common order for the sake of convenience and brevity. ITA No. 5926/DEL/2010 [Assessment Year: 2006-07] 2. At the very outset, it was pointed out by the ld. AR that the DRP while issuing directions had not adjudicated any specific g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransfer Pricing Officer ( Ld. TPO ) 1 Provision of Information Technology Enabled Service ( ITES ) Transaction Net Margin Method ( TNMM ) 1,19,79,337 2 Provision of Marketing Support Service ( MSS ) TNMM 17,96,427 3 Distribution Activity Resale Price Method ( RPM ) 13,17,536 For benchmarking its international transactions of provision of ITES and MSS, the assessee in its contemporaneous Transfer Pricing Documentation ( TP Documentation ) selected TNMM as the most appropriate method applying Operating Profit ( OP )/ Total Cost ( TC ) as the appropriate Profit Level Indicator ( PLI ). 7. The results of the comparable search and the economic analysis undertaken by the Appellant for benchmarking the said international transactions has been summarized below: S. No. Particulars Provision of ITES Provision of MSS 1 Comparable companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n; and Rejection of companies with different financial year ending (i.e. not March 31, 2008) or data of the company that does not fall within the 12 month period i.e. April 1, 2007 to March 31, 2008. 9. Based on the above economic analysis, the Ld. TPO arrived at the following results: S. No. Particulars Provision of ITES Provision of MISS 1 No. of comparables 26 2 2 Average OP/TC (Working Capital Adjusted) 27.64% 14.41% 3 Appellant OP/TC 9% 5% 4 TP Adjustment 149,79,337 1,796,427 10. Pursuant to the order passed by the Ld. TPO, the Ld. AO issued a draft order dated December 27, 2012, under Section 1440(1) of the Act, wherein he proposed to assess the total income of the assessee in conformity with the ALP determined by the TPO vide his order dated October 29, 2010. 11. As per the order passed by the TPO, the profile ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Hub Limited) from the list of comparable companies on account of different functional profile, compared to the Appellant. Moreover, the company has low wages to sales Ratio. 13. In the order passed by the Hon ble CIT(A), the revised final set of companies to be used to benchmark the Assessee s international transaction of provision of ITES is set out below: S. No Name of the company Corrected adjusted (OP/TC)% 1 Accentia Technologies Ltd 29.96% 2 Aditya Birla Minacs Worldwide Ltd. 10.19% 3 Allsec Technologies Ltd. 25.36% 4 Apex Knowledge Solutions Pvt. Ltd 11.62% 5 Apollo Healthstreet Ltd -16.55% 6 Bodhtree Consulting Ltd (Seg.) 2.86% 7 Caliber Point Business Solutions Ltd 5-13% 8 Cosmic Global Ltd. 9.8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to by it. I. PROVISION OF IT ENABLED SERVICES Selection of non-comparable companies by the Ld. TPO: 16. The CIT(A) has wrongfully included comparable companies selected by the Ld. TPO. The contentions of the assessee in respect of rejection of such comparable companies are depicted clearly by the following chart: 4 Flextronics Software Systems Ltd (Seg) Appellant has rejected the comparable company on the following grounds: Fails R D filter Diversified Segments Information u/s 133(6) 5 HCL Comnet Systems Services Limited (Seg) Appellant has rejected the comparable company on the following grounds: Fails RPT filter No data/annual report available Abnormally high margins 6 Informed Technologies Limited Appellant has rejected the comparable company on the following grounds: Super Normal Growth Fails RPT filter Abnormally high margin 7 Infosys BPO Ltd Appellant has rejected the comparable company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparability. Further, once the Appellant has selected a particular method as the most appropriate method, the burden of proof shifts to the TPO/AO to provide cogent reasons for rejecting the method followed by the Appellant before substituting and prescribing a new method. In view of the above the ld. AR submitted that the assessee has discharged its obligations and has demonstrated its transaction to be at arm s length and thus, no adjustment is warranted in this segment. 22. The ld. AR also placed reliance on the judgement of the Hon ble High Court at Delhi in the case of Luxottica India Eyewear Private Limited wherein it has been stated that: 10.3 ITAT decision to uphold RPM MAM over TNMM to benchmark trading transactions; ITAT had observed that no specific reason was given by TPO/DRP to reject RPM as MAM; ITAT had also held that Appellant cannot be estopped from claiming a particular method as MAM, though in TP study TNMM was adopted as primary method and RPM as secondary method; HC holds The Court sees no reason to interfere since the adoption of the RPM by the Appellant was indeed found to be the MAM by DRP itself, accordingly dismisses Revenue's appeal 23. Fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n case of distribution activities i.e., import of products and services from the AE and resale to the independent parties without any value addition, the RPM would be the most appropriate method on for determining the ALP. ii. Danisco (India) Pvt. Ltd. (Delhi ITAT) - [2014] 151 ITD 460- wherein it has been held that first examine whether there as any value addition on imported goods and if the answer is in the negative then apply RPM as a most appropriate method for trading transaction of imported goods. iii. Star Diamond Group (Mumbai ITAT) - [2011] 141 TTJ 21 (UO) - RPM is the most appropriate method for determining the ALP with respect to imports by a trader assessee. iv. Kodak Polychrome Graphics (I) (P) Ltd - (Mumbai ITAT) [2015] 171 TTJ 224 (Mum) - The assessee is, in fact, engaged in distribution activities. In such an activity RPM can be considered to be most appropriate method because bench marking is done at a gross level. v. ITO vs.Loreal India Pvt. Ltd. (Mumbai ITAT) - ITA No. 5423/Mum/2009- Held - RPM is one of the standard method and OECD guidelines also states that in case of distribution and marketing activities when the goods are purchased from AE's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arks etc) related to the services being provided by the assessee. Accordingly, being a mere service provider, the assessee does not own any interest in these intangibles and provides mere services based on the requirements of the AEs in return for a fixed mark up on cost incurred in rendering of services. For the purpose of the economic analysis, the cost plus mark-up of the assessee is compared against that of uncontrolled companies engaged in similar services. Such independent comparable uncontrolled companies, who operate under uncontrolled conditions, bear risks during the course of its operations including market risk, research and development risk, technology risk, credit risk, currency fluctuation risk, liquidity risk, default risk etc. As a result, the resultant profitability of such comparable uncontrolled companies is directly related to the level of risk borne, which is not so in the case of a captive service provider similar to the assessee as it assumes minimal risks and being an entity with a fixed mark up on the cost earn steady return year on year. The typical risks borne by these companies include market risk, product risk, technology risk, risk of project cost ove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of this bench of the Tribunal in the case of Toluna India Pvt Ltd reported in [2014] 50 Taxmann.com 609, Tata McGraw Hill Education pvt Ltd reported in [2015] 57 Taxmann.com 438 and Nokia Siemens Networks Indi Pvt Ltd reported in [2016] 70 Taxmann.com 236. 29. Per contra, the ld. DR strongly supported the findings of the TPO. 30. We find that the coordinate bench of the Tribunal in the case of Toluna India Pvt Ltd [supra] had examined the facts and after examining the profile of this company has excluded this comparable from the list of comparables. In another decision of the coordinate bench of the Tribunal in the case of American Express [India] {P} Ltd vs DCIT reported in [2017] 83 Taxmann.com 345 [Del], it has been held as under: The next comparable objected to by the assessee was HCL Comnet Services Ltd contesting that it is functionally dissimilar, follows different financial year, has different policy of revenue recognition and only segmental information received by the TPO u/s 133(6) of the Act was provided. 56. The ld DR submitted that it is also engaged in business of ITES Service provider therefore, it is functionally most comparable. 57. We have caref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he findings of the coordinate Benches [supra] we have no hesitation in directing the Assessing Officer/TPO to exclude Flextronics Software Systems Ltd [Seg] from the set of comparable. 32. Likewise, the assessee has objected to the inclusion of HCL Comnet Systems Services [Seg], Informed Technologies Limited, Infosys BPO Ltd, Wipro Ltd [seg] and Bodhtree Consulting Ltd and submitted that these comparables were considered by the coordinate bench of the Tribunal in the above mentioned case of American Express [India] Pvt. Ltd [supra] wherein from paras 37 to 64 it has also been held as under: 37. The next comparable is Accentia Technologies Ltd which is objected to by the assessee. The above company is selected by the ld Transfer Pricing Officer and further 133(6) notices were issued and it was found that this company is engaged in the medical transcription services and satisfies all the filters applied by the TPO. The assessee objected that this company is engaged in sales of software. The ld DRP rejected the contention of the assessee also. 38. Before us the ld AR submitted that ld TPO himself has stated that annual report for FY 2006-07 is not available and further no s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a ) Private Limited V DCIT ITA No 1868/del/2015 DCIT V American express ( India) Private Limited ITA No 1674/Del/2015 A Y 2007-08 upon the decision of Hon'ble Delhi High Court in case of Rampgreen Solutions Ltd 60 Taxmann.com 355 (Del). 42. The ld DR vehemently objected that it is one of the most ideal comparable as both are doing the same work. He further referred that data analysis is the main function of this comparable which is also done by the assessee. Hence, he pressed for retaining the same. 43. We have carefully considered the rival contentions. The Hon'ble Delhi High Court in 377 ITR 533 in Rampgreen solutions Pvt. Ltd Vs. CIT, has specifically held that this comparable company is engaged in KPO services. Further, the special bench in case of Mersk Global Centre India Pvt. Ltd Vs. ACIT 147 ITD 83 has also held that the comparable is KPO and excluded this company. Therefore, respectfully following the decision of the Hon'ble Delhi High Court we direct exclusion of this comparable. 44. The next comparables objected are Mapple Solutions Ltd and Triton Corp Ltd wherein AR has stated that this company promoters are engaged in Fraud and therefore should be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... report of the TPO that the first named company is carrying on the business of rendering data process services and BPO services. Objection has been raised that the directors of the company were involved in a fraud. This company is a wholly owned subsidiary of Haryana Fibres Ltd., whose promoters were involved in fraud as per newspaper report and the CBI report. The TPO mentioned that according to CBI bulletin of December, 2008, it was reported that the Rastogi family cheated Government of India to the tune of ₹ 54.00 crore in late 1980s and mid 1990s. Rastogi brothers had floated 14 firms for the purpose of export of bicycle parts to Russia and Hong Kong. They were arrested by the FBI and U.K. authorities and sentenced to imprisonment for more than 9 years. However, the report nowhere contains the name of this company. According to the data available at Prowess Data Base, it is engaged in the business of call centre activities; it had set up 100% EOU and it holds registration under section 10B. In regard to the second mentioned company, it was submitted that it is engaged in two activities i.e., telecom sector and BPO sector. It is also a company of Rastogi group and, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e current year. The coordinate bench has also noted that complaint did not name the above company but the tribunal has held that due to question mark on the reputation of the owner for that year though fraud happened in earlier years, it would be unsafe to take their result for comparability. The assessee has placed before us the balance sheet for the year ended on 31.03.2007 which has been audited by the auditor certifying that annual accounts of the company are true and fair‟. The DirectorAmerican Express ( India ) Private Limited V DCIT ITA No 1868/del/2015 DCIT V American express ( India) Private Limited ITA No 1674/Del/2015 A Y 2007-08 responsibility statement in the Director‟s report also shows that the accounts of the company are prepared according to the applicable accounting standards approved by the ministry of corporate affairs and they are true and fair. On perusal of the profit and loss account also we did not find any impact of fraud on the financial statements including the significant accounting policy and notes on account. None has been pointed out by the ld counsel. In fact it has not been disagreed by the ld AR that this company is functionally not c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ped by the company it provides data cleansing services by constantly upgrading the application therefore, there is an element of software development in the services provided by the company. From the above information, it is apparent that the comparable is a software developer. We are of the opinion that software developer is a company which passes on technology by developing a specific software applications whereas the assessee is not a software developer. Further, on analysis of the financial of the comparable company it is apparent that it has treated the data cleansing services and software development services as a single American Express ( India ) Private Limited V DCIT ITA No 1868/del/2015 DCIT V American express ( India) Private Limited ITA No 1674/Del/2015 A Y 2007-08 segment and therefore, segmental information are not available about software sales and software services. In view of absence of segmental information we are of the opinion that a software developer cannot be functionally comparable with a pure captive service provider. In view of this, we direct exclusion of Bodhtree Consulting Ltd from the comparability analysis. 51. The next comparable objected to by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormal profit making concerns, a reference has been made to the decision of the Special Bench of the Tribunal in the case of Maersk Global Centres (India) (P.) Ltd. v. Asstt. CIT [2014] 147 ITD 83/43 taxmann.com 100 (Mum. - Trib.). The relevant observations of the Bench are as under :-- In generality, we are of the view that the answer to this question will depend on the facts and circumstances of each case inasmuch as potential comparable earning abnormally high profit margin should trigger further investigation in order to establish whether it can be taken as comparable or not. Such investigation should be to ascertain as to whether earning of high profit reflects a normal business condition or whether it is the result of some abnormal conditions prevailing in the relevant year. The profit margin earned by such entity in the immediately preceding year/s may also be taken into consideration to find out whether the high profit margin represents the normal business trend. The FAR analysis in such case may be reviewed to ensure that the potential comparable earning high profit satisfies the comparability conditions. If it is found on such investigation that the high margin profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time of hearing, the learned counsel for the assessee has referred to the Annual Report of the said concern for the financial year under consideration to point out that the company has acknowledged a growth of 132.86% in its revenue generation as compared to the immediately preceding financial year. In our considered opinion, there is no material to say that the high profit margin of 34.71% declared by the said concern in the instant financial year is a normal business trend. Ostensibly, the financial results of either the three preceding financial years or of the succeeding financial year do not justify that the margin of 34.71% for the year under consideration is a normal business trend. Thus, in our considered opinion, the inclusion of the said concern in the final set of comparables would not lend credibility to the comparability analysis and therefore it deserves to be excluded. We hold so. 9. The plea setup by the CIT(A), and which has been reiterated before us is that the point setup by the assessee would involve consideration of multiple year data of the comparable whereas the transfer pricing analysis is required to be done based on the singular financial year data i.e. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e coordinate bench. 55. The next comparable objected to by the assessee was HCL Comnet Services Ltd contesting that it is functionally dissimilar, follows different financial year, has different policy of revenue recognition and only segmental information received by the TPO u/s 133(6) of the Act was provided. 56. The ld DR submitted that it is also engaged in business of ITES Service provider therefore, it is functionally most comparable. 57. We have carefully considered the rival contentions. The companies accounting year-ends on June 2007, however, the 133(6) data was submitted by the comparable from 01.04.2006 to 31.03.2007. We have also perused the annual report of the American Express ( India ) Private Limited V DCIT ITA No 1868/del/2015 DCIT V American express ( India) Private Limited ITA No 1674/Del/2015 A Y 2007-08 company at page No. 57 to 128 of the paper book. The main income stream of the assessee is bandwidth and other services and IT enabled services. The company has also provided segmental information at page No. 101 with respect to its telecommunication services division and IT enabled services division. In its IT enabled services division it provided serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormation were provided by the TPO to the assessee obtained u/s 133(6) of the Act and therefore, there is no objection about the functional dissimilarity with the company. Further, it was submitted by the ld AR that this company has operating revenue of ₹ 649 crores whereas the assessee gross revenue is only ₹ 55.94 lakhs, therefore, by mere size this company is required to be excluded. Hon'ble Delhi High Court in case of Pr CIT Vs. Actis Global Services finds merit that size and scale of the operations makes it inapposite comparable. In the present case the difference in the gross revenue from ₹ 649 crores of the comparable itself which is more than 1200 times of the turnover the assessee company. In view of this we direct the exclusion of the Infosys BPO ltd from the comparability analysis. American Express ( India ) Private Limited V DCIT ITA No 1868/del/2015 DCIT V American express ( India) Private Limited ITA No 1674/Del/2015 A Y 2007-08 61. The next comparable is Wipro Ltd which is contested by the assessee stating that during the year there is an acquisition of the real business therefore, it makes an exceptional year. It was also contended that it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umer care and lighting. However, on the basis of the working submitted by the ld TPO it shows that segmental revenue of ₹ 9797767937/- which is for the reasons stated with respect to exclusion of Infosys BPO squarely applies to this comparable also. In view of this, we direct to exclude Wipro from the comparability analysis. 33. It was submitted by the ld. AR that the profile of the assessee in the present case is similar to the profile in the case of American Express [India [P] Ltd [supra] and therefore, respectfully following the decision of the coordinate benches, we direct the Assessing Officer /TPO to exclude these companies from the set of comparables. 34. In respect of marketing support services, the assessee s primary contentions reiterated those as provided for the approach followed by the TPO with respect to the quantitative and qualitative filters applied for making adjustment to the assessee s provision of ITES segment (supra above). 35. In addition to the above, the assessee contended that on one of the comparable companies i.e. M/s Reliance Communications Infrastructure Ltd. (Marketing Commission segment) selected by the Ld. TPO in his TP order for d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... high at 32.7%. In the light of the above, we direct the exclusion of this company from the list of comparables. DISTRIB UTION SEGMENT 38. The ld. AR submitted that the TPO/ CIT(A), rejected the economic analysis conducted by the assessee in its TP documentation with respect to its distribution activity by rejecting the assessee s use of the RPM as the most appropriate method and selection of TNMM for determining the ALP of the said transaction. The ld. AR further submitted that the TPO himself has allowed the use of RPM Method in the next AY 2008-09 and has made no TP adjustment. 39. The Most Appropriate Method is a method which, under the facts and circumstances of the transactions under review, provides the most reliable measure of an arm s length result. Rule 10C of the Income Tax Rules, provide: (1) For the purpose of sub-section (1) of section 92C, the most appropriate method shall be the method which is best suited to the facts and the circumstances of each particular international transaction, and which provides the most reliable measure of an arm s length price in relation to the international transaction. (2) In selecting the most appropriate method as spe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... slation, other factors such as nature and class of international transactions, conditions prevailing in the market, extent and reliability of adjustments that can be made, and the extent and reliability of assumptions that may be required in applying the method, shall also be taken into account. As the selection of the Most Appropriate Method involves a test of relative merit, a method that may not be perfect is not rejected unless some other method can be shown to be more reliable or provide a better estimate of an arm s length result. 41. Per contra, the ld. DR has submitted that the agreement which the assessee was reprinting and distributing books and it was not mere seller of product imported by it. Therefore, RPM was not appropriate method and the TPO has rightly applied TNMM for bench marking the distribution activity. 42. We have heard the rival submissions and have carefully perused the relevant material on record. The agreement entered into by the assessee with AE clearly provides cope of activities of the assessee which includes reprinting of books received by the assessee from AE in E format. In our considered opinion, reprinting of books needs deployment of ass ..... X X X X Extracts X X X X X X X X Extracts X X X X
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