TMI Blog2016 (6) TMI 1358X X X X Extracts X X X X X X X X Extracts X X X X ..... ered by IHG IT SERVICES (INDIA) (P.) LTD. [ 2013 (5) TMI 309 - ITAT DELHI] wherein it was held that the benefit of 5% tolerance margin would be available only if the variation is within the tolerance margin. Once the variation exceeds the tolerance margin, then no benefit of tolerance margin would be available to the assessee. Respectfully following the decision of the Special Bench, we direct the AO/TPO to grant the benefit of tolerance limit of 5% if the variation after passing the consequential order to the Tribunal is less than 5% and accordingly, the issue is restored to the file of the AO. - IT(TP)A No.1222/Bang/2013 And Cross Objn. No. 165/Bang/2015 (In IT(TP)A No. 1222/Bang/2013) - - - Dated:- 30-6-2016 - SHRI VIJAY PAL RAO, JUDICIAL MEMBER And SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER For the Appellant : Shri S.R.Kuruppusamy, JCIT(DR) For the Respondent : Shri Nageshwar Rao, Advocate. ORDER Per INTURI RAMA RAO, AM : The appeal filed by the revenue and the cross objections by the assessee are directed against the order of the CIT(A)-IV, Bangalore, dated 03/05/2013 for the assessment year 2008-09. 2. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hearing, it is prayed that the order of the CIT(A) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored. 9. The appellant craves leave to add, alter, amend and/or delete any of the grounds mentioned above. 3. The assessee-company raised the following cross-objections: On the facts and circumstances of the case and in law: The learned CIT(A) has erred, in law and in facts, by not accepting the Respondent's plea in entirety and confirming with the Learned Assessing Officer ( AO)/ Transfer Pricing Officer ( TPO ) on not accepting the economic analysis undertaken by the Respondent! Assessee in accordance with the provisions of the Act read with the Income Tax Rules, 1962 and conducting a fresh economic analysis for the determination of the arm's length price in connection with the impugned international transaction and holding that the Respondent's international transaction is not at arm's length. 2. The learned CIT(A) has erred, in law and in facts, in not accepting the Respondent's plea and confirming with the Learned AO/TPO by determining the arm's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces, creation of vendor master data and patent search. 5. Return of income for the assessment year 2008-09 was filed on 29/09/2008 declaring a total income of ₹ 12,32,82,897/- .The assessee-company also reported the following international transactions with its Associated Enterprises (AE): 6. The assessee-company sought to justify the consideration received for the international transaction entered with its AE to be at arm s length price [ALP]. The assessee-company had also submitted transfer pricing study report adopting TNMM as the most appropriate method and cost plus method as a profit level indicator for the transferring pricing study. The assesseecompany applied Transactional Net Margin Method [TNMM] which was considered to be the most appropriate method for purposes of bench marking the international transactions. The assesseecompany s profit margin was computed at 1.83% in respect of trading activity and 12.97% in respect of marketing support services and 13% in respect of ITeS. The assessee-company claimed that the same was comparable with other comparables. For the purpose of transfer pricing study, the assessee-company had chosen 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Infosys BPO Ltd. 11 Jindal Intellicom Pvt.Ltd. 12. Mold Tek Technologies Ltd. 13. R Systems Internatinal Ltd.(ITES Segment) 14. Wipro Ltd. (BPO Division) Thus, the TPO rejected 8 of 14 comparables selected by the assessee-company and introduced 14 comparables and finally selected the following 20 comparables. The TPO computed average profit margin of the comparables in respect of ITeS services at 24.75% and after giving working capital adjustment of 2.82%, adjusted arithmetical mean of PLI was determined at 21.93%. On the above basis, the TPO computed the transfer pricing adjustment in respect of ITeS as follows: The AO passed the assessment order dated 09/02/2012 passed u/s 143(3) after making addition on account of adjustment u/s 92CA of ₹ 56,66,602/-. 8. Being aggrieved, an appeal was filed before the ld.CIT(A) who, vide impugned order partly allowed the appeal. It was contended before the ld.CIT( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e into operation only from the assessment year 2009-10. 9. Being aggrieved by that part of the order of the ld.CIT(A), the revenue is in appeal and the assessee is also in cross objections aggrieved by that part of the order of the ld.CIT(A) 10. We shall first take up the revenue appeal. Before us, learned Departmental Representative argued that the ld.CIT(A) ought not to have applied the turnover filter and excluded the companies M/s.Aditya Birla Minacs Worldwide Ltd., M/s.Coral Hubs Ltd., M/s.Eclerx Services Ltd., M/s Infosys BPO Ltd., M/s Jindal Intellicom Pvt. Ltd., M/s.Mold-tek Technologies Pvt. Ltd., M/s.Wipro Ltd.(seg) and M/s.Allsec Technologies Pvt. Ltd., in ITES segment as comparables. The Learned DR argued that the turnover cannot be relevant criteria in the service segment. The turnover band of ₹ 1 to ₹ 200 crores is bereft of any rationality as the application of this rule does not enable comparison of a company with ₹ 200 crores with another company having a turnover of ₹ 201 crores. Learned DR relied on the decision of the Mumbai bench of the Tribunal in the case of Willis Processing Services (I) (P) Ltd., vs. Dy.CIT (2013) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be classified as high end KPO. In support of the stand of the assessee, extracts from the annual report of this company have been pointed out. It has further been submitted that extra ordinary events and peculiar circumstances prevail in the case of the assessee in as much as this company acquired a UK based company which has significantly contributed to the increase in the customer and revenue base of the company. This Tribunal in the case of Capital IQ Information Systems India Pvt. Ltd. (supra) had an occasion to deal with comparability of this company in the case of an ITES company such as the Assessee and the Tribunal held as follows:- 14. The assessee has objected for this company being taken as comparable mainly on the ground that it was having a supernormal profit of 89%, and as such it cannot be taken as a comparable in view of the decision of the Mumbai Bench of the tribunal in the case M/s. Teva India Ltd. (supra). That apart, relying upon the annual report of the company, the learned Authorised Representative for the assessee has contended that that the concerned company is engaged in providing Knowledge Process Outsourcing(KPO) Services. 15. On ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany cannot be regarded as a comparable. Respectfully following the decision of the co-ordinate benches, in the cases cited supra we direct the AO/TPO to exclude this company from the list of comparables. 12.3 M/s.Wipro Ltd., was held to be incomparable by on the ground of functional dissimilarity by the co-ordinate bench in the case of Symphony Marketing Solutions India Pvt. Ltd. vs. ITO [IT(TP)A.1316/Bang/2012 dated 14/08/2013] wherein it was held as follows: 26. .........As far as this company is concerned, the discussion made while deciding Infosys BPO Ltd. as a comparable will equally apply to this company also. This company owns substantial intellectual property on software products. This company cannot therefore be regarded as a comparable. For the reasons given while disregarding Infosys BPO Ltd. as a comparable, this company is also directed to be excluded from the list of comparables. Respectfully following the decision of the co-ordinate benches, in the cases cited supra we direct the AO/TPO to exclude this company from the list of comparables. 13. The grounds No.3 and 4 raised by the revenue are not pressed by the rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fect form 1st October, 2006. There was a de-merger of Plastic Division of the company and the resulting company is known as Moldtek Plastics Limited. The de-merger from the Moldtek Technologies took place with effect from 1st April, 2007. The merger and the demerger needed the approval of the Hon'ble High Court of Andhra Pradesh and also the approval of the shareholders. The shareholders of the company gave approval for the merger and the de-merger on 25.01.2008 and the Hon'ble High Court of Andhra Pradesh had approved the merger and de-merger on 25th July, 2008. Subsequently, the accounts of Moldtek Technologies for FY 2007-08 were revised. On a perusal of the annual report it is noticed that Teckmen Tools Pvt. Ltd. and the Plastic Division of the company were demerged and the resulting company was named as Moldtek Plastics Ltd. The KPO business remained with the company. A perusal of the Annual report revealed that to give effect to the merger and demerger, the financial statements were revised and restated after six months form the end of the financial year 31.3. 2008. The assessee filed Form No.21 under the Companies Act with the Registrar of Companies on 26th August, 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed services and other related services. Further the business of this company requires skilled manpower and scientists, civil engineers, etc. The assessee is a routine ITES provider who does not require such highly skilled employees. Besides the above, this company also carries out R D services and own intangibles. The aforesaid facts, in our view, will take this company out of the list of comparables. We may also point out that the objection of the assessee in this regard has been disregarded by the TPO by mere observation that it cannot be rejected on the basis that it is into different functional line within ITES. In this regard, we may refer to the decision of the ITAT Bangalore Bench in the case of First Advantage Offshore Services Ltd. (supra), wherein it was observed as under:- 39. Having heard both the parties and having considered their rival contentions, we find that the assessee had raised elaborate objections to each of the comparables in group 3 before the TPO. The TPO has also reproduced the said objection in his order para 6.5.1. of page 178 of his order. He has rejected the contention of the assessee by holding that every function within BPO sector can be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be excluded from the list of comparables. Respectfully following the decision of the co-ordinate bench in the case supra, we uphold the action of the ld.CIT(A) in excluding this company from the list of comparables. Hence, the grounds of appeal raised by the revenue are dismissed. 16. Ground No.8 is general in nature and does not require adjudication. 17. In the result, the revenue appeal is partly allowed. 18. Now let us take up the cross objections by the assessee company. In the cross objections filed, the only objection pressed by the learned counsel for assessee is that the ld.CIT(A) ought to have granted the deduction of +/ 5% under proviso to Sec.92C of the Act. An Explanation was added to section 92C(2) with retrospective effect from 1/10/2009. This Explanation was considered by the Special Bench of Tribunal in the case of High IT Services (India) Pvt. Ltd. vs. ITO (33 taxmann.com 1 (Del.Trib.) wherein it was held that the benefit of 5% tolerance margin would be available only if the variation is within the tolerance margin. Once the variation exceeds the tolerance margin, then no benefit of tolerance margin would be available to th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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