TMI Blog2018 (10) TMI 1262X X X X Extracts X X X X X X X X Extracts X X X X ..... own web based software. Therefore, it is apparent that for the year it did not carry its business with different tools need to be added. The nature of filter applied by the TPO which is generally not applicable in service industry. The non utilization of the assets or under utilization thereof may be internal inefficiency built in of the comparable company however, when it is functionally comparable it cannot be rejected. - ITA No. 2373/Del/2011, CO No. 214/Del/2011 - - - Dated:- 5-10-2018 - Shri Amit Shukla, Judicial Member And Shri Prashant Maharishi, Accountant Member For the Assessee : Shri Sanjai Kumar Yadav, Sr. DR For the Revenue : Shri Vishal Kalra, Adv ORDER PER PRASHANT MAHARISHI, A. M. 1. This is an appeal filed by the revenue and the cross objection filed by the assessee against the order of the ld CIT(A)-XX, New Delhi dated 28.02.2011 for the Assessment Year 2004-05. 2. The revenue has raised the following grounds of appeal:- 1. On the facts and circumstances of the case and in law, the ld CIT(A) has erred in not affording any opportunity to the TPO before proceedings to compute the margins of the comparables and the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustment of ₹ 31616086/-. The ld AO passed an order u/s 143(3) of the Act 26.12.2006 where the total income of the assessee was assessed at ₹ 31652067/- incorporating above adjustment proposed by the ld TPO. The assessee preferred an appeal before the ld CIT (A). The ld CIT (A) passed an order on 28.02.2011. In the appellate order he deleted the adjustment made by the ld TPO of ₹ 31616086/-. Therefore, the revenue is in appeal before us. The assessee has also filed cross objection. The only issue in dispute is determination of arm's length price of international transaction qua selection of comparables. Certain comparables assessee wants inclusion / exclusion. Similarly, AO/ TPO in appeal are contesting certain comparables removed by the ld CIT (A) to be included. 7. The brief fact shows that the company is engaged in medical transcription business. The business profile of the assessee company is not in dispute. Assessee is primarily engaged in the business of provision of IT enabled services in the area of medical transcription to its associates enterprise and it provides such services exclusively to its foreign AE i.e. M/s. Heartland Medical Information ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same should be excluded. B. Ultramine and Pigments Ltd, which was selected by the appellant in its TP study report and also included by the ld TPO which assessee contested before the ld CIT(A), now contested by the assessee to be rejected. C. Fortune Infotech Ltd which has been included by the ld Transfer Pricing Officer and retained by the ld CIT(A) is contested for rejection D. Tricom India Ltd which was accepted by the assessee in its TP study report and also accepted by the TPO and also retained by the ld CIT(A) is requested for exclusion. We will deal with these comparables later on. 12. On coming to the grounds of appeal of the revenue, the first ground is with respect to not affording any opportunity of hearing to the ld Transfer Pricing Officer before the proceeding to compute the margins of the comparables . 13. The ld Sr DR vehemently submitted that the assessee was given complete opportunity before the ld CIT(A) however, no opportunity was afforded to the ld TPO. Therefore, the order is bad in law. 14. The ld Authorised Representative submitted that the ld CIT(A) has obtained the remand report and therefore, there is no violation of principles of natur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld that in absence of reasonable basis for arriving at the risk adjustment, same cannot be granted. No infirmity was shown to us with respect to these finding. With respect to the working capital adjustment he has held that as TPO in principal has agreed for the working capital adjustment and granted adhoc adjustments of 2 %. The ld CIT (A) has accepted the argument of the assessee and granted the working capital adjustment as per OECD Guidelines 2010. Therefore, no infirmity can be found in the order of the ld CIT(A). 20. Now we come to the issue of comparables which is dealt with as under:- A. Vishal Information Technologies The ld TPO has introduced this comparable. The main contention of the assessee is that the above company is outsourcing the work to third party vendor and to demonstrate this it is stated that its wages to total cost ratio is only 1.38% compared to the assessee which is 51.22%. The reference to the annual report furnished was made and submitted that the comparable has the outsourcing model which is not comparable with the business model of the assessee. He further submitted that for AY 2005-06 and 2006-07 this company was excluded in comparabil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble it is apparent that balance sheet submitted by the assessee at page No. 495 to 513 does not show that what functions are carried out by this company. Therefore, we reject the argument of the ld AR that it is engaged in the business of 'data analytics' and 'data processing'. Further, the ld AR also tried to compare the services of data analytics with the services of business analytics. We are not amused by this argument and hence we reject the same. However, on account of different business model, we direct the ld AO/ TPO to exclude the same for comparability study. Accordingly, we reverse the finding of the ld CIT(A) with respect to this comparable. B. Ultra Marine and Pigments Ltd This company was selected as comparable by the assessee TPO has also accepted the same. The ld CIT(A) has also held that company is to be retained as the comparable. The ld AR has submitted that this company is functionally not comparable as its ITES segment is providing engineering services to overseas and domestic customers which requires of high level of human resources. Further, its ITES division is known as 'Lapiz Digital Services' and as per the Website ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not at all been objected by the assessee before the ld CIT(A), therefore, it cannot be objected now. We have carefully considered the rival contentions and find that contention of the ld DR is correct and the ld AR could not show us the relevant paragraphs where the assessee has objected to this comparable. We have also looked at the annual accounts of this company at page No. 560 to 603 of the paper book. As per page NO. 573 of the paper book it is apparent that the comparable is carrying on the business of 'medical transcription' only. The income from operations at page No. 569 of the assessee also shows that it is in the business of BPO. Merely because the assessee is carrying on its business through different tools simply cannot make it non comparable, if the functions performed by them and various filters applied in accept/ reject matrix allows it to be included. The assessee is relying on Annexure A to the Director's report where the assessee is required to show the efforts made by it in technology absorption and innovation. Further, the report says that the company has made considerable progress in development of its own web based software. Therefore, it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turnover of comparable as well as brand ownership and consequent premium pricing. He relied upon several decisions. We have carefully considered the rival contentions. We find that Wipro BPO solutions Ltd has turnover of ₹ 438 crores compared to turnover of ₹ 13 crores of the assessee. It shows that the turnover of the comparable is 30 times higher than the turnover of assessee. The profit and loss account of this company is placed at page No. 385, wherein, the turnover is ₹ 430 crores and the net profit of the assessee is ₹ 103 crores. Further, this comparable has paid technology operating charges to the tune of ₹ 66.34 crores. In view of this we do not find any infirmity in the order of the dl CIT(A) in excluding Wipro BPO Solutions Ltd from the comparability analysis. The similar issue has been decided by Hon'ble Bombay High Court in 381 ITR 216 where the company is having turnover more than 23 times was held to be excludible in the comparability analysis. Therefore, respectfully the decision of the Hon'ble Bombay High Court we upheld the exclusion of Wipro BPO Solutions Pvt. Ltd F. Ace Software The above company was included by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arable considered - Ace Software Export Ltd Submission: We submit that the above clause shall apply in case of enterprise that manufacture or process goods or articles. In the present case, however the comparable company under consideration (i.e. Ace Software Exports) is in the business of providing service to Apex Data Services and hence not covered within the definition mentioned above. It cannot be said that the prices and other conditions relating thereto are influenced by Apex Data Services Inc. Further, the comparable has transactions with Apex Data Services Inc., which is not reflected as an associated enterprise / related party in the schedules to the audited financial results of the company. Consequently, Ace Software Export Ltd. cannot be rejected as comparable. In fact it is good comparable as it services a single customer in an uncontrolled environment, very similar to the nature of business of the tax payer. Unquote On the basis of above, it can be concluded that the Id. TPO has grossly erred in application of provision of section 92A of the Act. Further, Id. TPO has used his own wisdom, without any legal basis to conclude that the buyer can control the pric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elf is that income should be more than ₹ 1 crore - hence rejected as a comparable. The TPO further stated as under: The data to be taken whether contemporaneous or prior year data is dealt separately in the coming paras. The data taken for the study being contemporaneous and the company failed to qualify the required parameters adopted by the taxpayer himself the company is not being taken as a comparable. In response to this the taxpayer submitted as under: The Id. TPO has rejected the company on the ground that the sales of the company in FY 2003-04 is less than ₹ 1 Cr. In response to this the appellant had filed a detailed reply wide submission dated 18th October, 2006 (Attached as Appendix - 3, page 181 of paper book). In addition to this the appellant further wants to submit that Id. TPO has used the latest year data which has been contested in this submission as per point 1 above. Without prejudice to above the appellant submits that at the time when TP Study was prepared, data for FY 2001-02 FY 2002-03 was considered and weighted average sales was greater than ₹ 1 Cr. Further, the following table shows that the turnover of T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A). Therefore, we confirm his findings and hold that Tulsian Technologies is a good comparable. H. Transwork Information Technologies Ltd.: Transwork Information Technologies Ltd is rejected by the TPO as consistent loss making company. The ld CIT(A) has held that the above company is a good comparable. It is further stated before us that TPO has accepted the above company in AY 2005-06 and 2006-07. Over and above the reasons given by the ld CIT(A) when the TPO has accepted in subsequent years when there are losses for this similar reason following the consistency principle we find no infirmity in the order of the ld CIT(A) in including the above comparable. I. Mapro Industries : This comparable has been rejected by the ld TPO for the non utilization of the assets. The whole facts are captured by the ld CIT(A) in para No. 9.16 of his order as under:- Mapro Industries: The TPO rejected this company on the issue of proper utilization of the assets. The following is the observation of the TPO: The major objection of the TPO is the proper utilization of the assets. The company s sales are not even 26% of the assets utilized, where as in the case of the taxpayer it i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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