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2018 (8) TMI 712

ernational transactions u/s 92CA(3) of the Act. - The TPO also noticed that the arm’s length price of the international transactions representing IT enabled services provided to the AEs was determined by the assessee by applying transactional net margin method (TNMM) and the operating profit to total cost ratio (OP/OC) was taken as the profit level indicator (PLI) in the TNMM analysis. He also noticed that the PLI of the company was arrived at 17.36% on cost whereas the average PLI of the comparables was arrived at 14.13% as per the analysis in the TP documents and that the PLI of the comparable companies had been worked out by adopting weighted averages for the current year and the immediately preceding periods. - Held that:- Since, the facts in assessee’s case are similar to the facts involved in the case of [2016 (9) TMI 1392 - ITAT DELHI]. So, respectfully following the said order, we direct the AO to exclude the aforesaid comparable while working out the arm’s length price. - Regarding exclusion of certain comparable, decision of DRP sustained. - Decided in favor of assessee and revenue partly. - ITA No. 1974/Del/2015, ITA No. 6201/Del/2015 And CO No. 23/Del/2016 - 10- .....

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comparables, with very high turnover as compared to the Appellant; 3.6 Not providing the benefit of economic adjustment on account of differences in risk profile between the Appellant and the final comparable set, in arriving at the arm's length margin; 4. The Ld. AO/ Ld DRP/Ld. TPO erred in disregarding the multiple year data selected by the Appellant in the TP Documentation and in selecting the current year (i.e. financial year 2009-10) data for comparability despite the fact that at the time of comparison done by the Appellant, the complete data for financial year 2009-10 was not available within the public domain. 5. The Ld. AO/LD DRP/Ld. TPO erroneously computed the margins of some of the companies selected by him as comparables. 6. That on the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings u/s 271(1)(c) of the Act mechanically and without recording any adequate satisfaction for such initiation. 7. That the Ld, AO erred in facts and in law in charging and computing interest under section 234B and 234D of the Act. That the above grounds are independent and without prejudice to each other. The Appellant craves leave to .....

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07-08 Average 1. Aditya Birla Minacs Worldwide Ltd NA 21.43% -4.36% 8.76% 2. Cosmic Global Ltd NA 40.61% 23.30% 32.38% 3. Informed Technologies India Ltd NA 22.61% 3.63% 10.89% 4. Nittany Outsourcing Services Pvt. Ltd. NA NA 19.38% 19.38% 5. Datamatics Financial Services Ltd. NA -6.46% 0.55% -3.03% 6. Omega Healthcare Management Services Pvt. Ltd. NA 15.43% -0.73% 9.34% 7. Jeevan Softech Ltd. (BPO & ITES segment) NA 13.44% NA 13.44% 8. R System International Ltd 7.07% 14.08% 9.53% 10.43% 9. Caliber Point Business Solutions Ltd. (Segmental) 21.16% * * 21.16% 10. Ultramarine & Pigments Ltd -11.43% 24.59% 29.28% 13.28% 11. Firstobject Technologies Ltd. NA 5.22% 5.02% 5.15% 12. Sarawat Infotech Ltd. NA * * * 13. Crossdomain Solutions Pvt. Ltd. NA 29.40% 26.98% 28.32% Mean 14.13% 7. The TPO, however, selected his own 10 comparables and worked out the average margin at 31.73% and proposed the adjustment of ₹ 1, 15, 16, 983/- by observing as under: 9. This office has examined the search process of the assessee. The description of the filters to be used and the justification to apply them is given below. An analysis of companies in the accept/reject matrix has also been done .....

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y lead to the conclusion that the company is not engaged in IT enabled services. Services are rendered through employees. The expenditure incurred on purchase of raw material, trading goods etc. is negligible in such cases. Employees cost constitutes the major component of cost in any service sector.Very low employee cost, viz., less than 25% of total cost, indicates that company is either engaged in some other business or it has outsourced the service functions to a third party, i.e., it is not rendering services on its own. Such companies cannot be treated as functionally comparable to the assessee. viii. Companies that are affected by some peculiar economic circumstances: Companies that are affected by factors like persistent losses, declining sales, extraordinary income or expense, mergers and acquisitions or other such factors which affect the operations of the company substantially should not be used as comparables as they will not prove to be good benchmarks. 10. Based on the remarks above, the comparables used by you while giving the updated margins, are discussed w.r.t. the acceptance or rejection of these comparables. Sl. No. Name of the comparable Remarks 1. Aditya Birla .....

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capital adjustment. 9. The ld. DRP rejected the objection raised by the assessee for exclusion of the comparables selected by the DRP, however, accepted the contention with regard to the adjustment on account of working capital. On the direction of the ld. DRP, the AO made the addition of ₹ 99, 14, 264/- on account of adjustment to the arm s length price after correcting the margin of comparable companies M/s Cosmic Global Ltd. & M/s e4e Healthcare Services Pvt. Ltd. and working capital adjustment. 10. Now the assessee is in appeal. The ld. Counsel for the assessee submitted that the following comparables need to be excluded on account of functional dissimilarity: i. TCSE-Serve International Ltd. ii. TCS E-Serve Ltd. iii. Infosys BPO Ltd. iv. Accentia Technologies Ltd. v. e4e Healthcare Business Services Ltd. It was further submitted that segmental information were not available in respect of M/s TCSE-Serve International Ltd., M/s TCS E-Serve Ltd. & M/s Accentia Technologies Ltd. and that M/s Infosys BPO Ltd. acquired M/s McCamish Systems LLC while in M/s Accentia Technologies Ltd. amalgamation of M/s Ascent took place. It was further submitted that M/s TCSE-Serve In .....

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l available on the record. As regards to the issue relating to exclusion of Infosys BPO Ltd., TCS E-Serve International Ltd. and TCS E-Serve Ltd. is concerned, it is noticed that this issue has been decided by the ITAT Delhi Bench I , New Delhi in the case of Equant Solutions India Pvt. Ltd. Vs DCIT in ITA No. 1202/Del/2015 for the assessment year 2010-11 (supra) and the relevant findings have been given in paras 22 to 24 of the order dated 21.01.2016 which read as under: 22. Infosys BPO Limited a. The assessee further objected to inclusion of Infosys BPO Ltd as comparable which has a margin at 31.44%. Before the TPO assessee submitted that, this is the company, which has very high turnover and has huge brand value. Submission of the assessee that higher profits is because of highly established brand in the market place. TPO rejected the contention of the assessee holding that the assessee has failed to establish how the brand has influenced increased profitability of the comparable. The ld DRP also rejected the contention of the assessee. Before us, the assessee submitted that comparable is engaged in highend integrated services in improving the competitive position of their clien .....

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ogy services such as software testing, verification and validation of the software. Therefore, it is functionally dissimilar to the assessee. Further annual report of the company does not provide any segmental information related to ITES as well as software development services. The company also owns intangible of substantial amount and is benefitted usually by the Tata Brand. The company is also making appellant for use of such brand. Therefore this aspect also makes this comparable as inappropriate and therefore we order to exclude this comparable. 24. TCS E Serve Limited a. TPO included this comparable, which has a margin of 63.42%. The ld. DRP has also held that the far profile of the company is similar. Before us, ld. AR submitted that the company is dissimilar functionally. In addition to BPO services, it is also engaged in technical services such as software testing, verification and validation. It has also developed software such as transport management software. It does not have segmental reporting too. It was further submitted that the company owns substantial intangible assets in form of software licenses and it makes a payment for Tata Brand and therefore it gets the be .....

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company is into health care outsourcing services and in addition it also renders software development services. It is also observed that segmental information in respect of this company is not available. The company is also a 100% EOU, under ST PI guidelines. We are therefore inclined to accept the contention of the assessee that this company should be excluded as a comparable. Hence we direct the Assessing Officer to do so. 15. Since, the facts in assessee s case are similar to the facts of the aforesaid referred to case of M/s Bechtel India Pvt. Ltd. Vs DCIT (supra). So, respectfully following the aforesaid referred to order dated 21.04.2015 of the Co-ordinate Bench, these two comparables are also directed to be excluded. 16. As regards to Ground No. 7, it was the common contention of both the parties that charging and computing of interest u/s 234B and 234D of the Act is consequential in nature. We order accordingly. 17. In departmental appeal for the assessment year 2011-12 i.e. in ITA No. 6201/Del/2015, following grounds have been raised: 1. "On the facts and in the circumstances of the case, the DRPII erred in directing to reduce the addition of ₹ 1, 52, 88, 220/- .....

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.70 8. Microgenetic Systems Ltd. -3.20 9. T C S E-Serve Ltd. 69.31 Mean 25.89 21. The TPO proposed the adjustment of ₹ 1, 52, 88, 220/-. Thereafter, the AO passed the draft assessment order and proposed the aforesaid adjustment. Against the said draft order passed by the AO, the assessee raised the objection before the ld. DRP who directed to exclude the comparables by observing as under: I. Accentia Technologies Ltd., Acropetal Technologies Ltd. & Eclerx Services Ltd., ICRA Techno Analytics Ltd.: There are functional variations wrt Acropetal Technologies Ltd. & Eclerx Services Ltd., ICRA Techno Analytics Ltd. as the assessee is into low end, back end support whereas the comparable is in to KPO business and engaged into development and sale of products. Hence these are to be excluded. Accentia Technologies Ltd. was accepted in last DRP order. In order to maintain consistency, this comparable shall be retained. II. Infosys BPO Ltd. & TCS E-Serve Ltd.: These are mega Companies and require to be excluded as discussed in earlier paras. 22. Now the department is in appeal. The ld. Sr. DR strongly supported the order of the TPO/AO while the ld. Counsel for the assessee .....

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dings of the ITAT are reasonable and based on record. The third comparable that the AO/TPO excluded is TCS E-serve. The ITAT observed that though there is a close functional similarity between that entity and the assessee, however, there is a close connection between TCS E-serve and TATA Consultancy Service Ltd. which was high brand value; that distinguished it and marked it out for exclusion. The ITAT recorded that the brand value associated with TCS Consultancy reflected impacted TCS E-serve profitability in a very positive manner. This inference too in the opinion of Court, cannot be termed as unreasonable. The rationale for exclusion is therefore upheld. The assessee was aggrieved by the inclusion of Accentia a Software Development Company. The Revenue is aggrieved by the exclusion of Accentia from the TP analysis. The DRP had directed its deletion. We observe that the ITAT has noticed the unavailability of the segmental data so far as these comparables are concerned. Furthermore, the functionality of this entity was concerned, it is different from that of the assessee; Accentia was engaged in KPO services in the healthcare sector. 24. We, therefore, by respectfully following t .....

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onsidered but not the financials of the next year. 30. On a perusal of page No.45 & 46 of the annual report of Acropetal, we find that the submission of the ld. AR is justified. We, therefore, direct the ld. AO to verify the employee cost percentage to the total cost and if it does not pass the filter, to exclude the same. 26. Since, the facts for the assessee s case are similar to the facts in the aforesaid referred to case of M/s Cadence Design Systems (I) (P) Ltd. Vs ACIT. So, respectfully following the aforesaid referred to order, we direct the AO to decide as has been directed by the ITAT in the above said case. 27. As regards to the Cross Objection filed by the assessee in CO No. 23/Del/2016, the ld. Counsel for the assessee submitted that it is to be considered as academic in nature in case the departmental appeal is dismissed. Since, we have decided the appeal of the department in former part of this order and it has been held that four out of five comparables were rightly excluded by the ld. DRP and one of the comparable is directed to be excluded after verification. Therefore, the Cross Objection filed by the assessee is considered as academic in nature and hence dism .....

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