TMI Blog2016 (1) TMI 1436X X X X Extracts X X X X X X X X Extracts X X X X ..... s been brought on record to show that any of the foreign exchange loss / gain had come from any hedging activity or any other line of activity undertaken by the assessee. Unless rebutted a safe presumption can be made that foreign exchange loss / gain arose out of the business activity of the assessee which was entirely providing ITES services to its principal abroad. We cannot say that foreign exchange loss / gain had no nexus with such activity. We are therefore of the view that the DRP took a correct view on this issue. DRP had accepted the submission of the assessee that such gains / losses were closely linked to its business operation did and not relate to any extra ordinary or abnormal events. Grounds 3 and 4 stand dismissed. Grant of risk adjustment without advising a reasonably accurate method for its determination - Assessee in its TP study had not made any adjustment for risk while calculating of PLI - HELD THAT:- Assessee itself had never made any attempt in its TP study to quantify the risk. On the other hand, assessee itself had mentioned the difficulties of attempting a risk adjustment. DRP was putting the onus on TPO to give a risk adjustment on the PLI, when ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntal income was excluded while calculating the PLI of the assessee, corresponding rental expenditure was also required to be excluded - HELD THAT:- AO in the assessment done pursuant to the DRP directions had excluded rental income from the business income. As per the assessee it had incurred expenditure of ₹ 23,75,000/- which is relatable to the earning of rental income. We are of the opinion that once rental income is excluded from the business income of the assessee while calculating the PLI of the assessee, as a natural corrolary expenditure incurred for earning such rental income is also required to be excluded. We therefore set aside the orders of authorities below and direct the AO / TPO to rework the PLI by excluding both rental income and the expenditure relatable to the rental income after proper verification. Ground 7(h) of the assessee is treated as allowed for statistical purpose. Working capital adjustment though directed by the TPO to be given in the order passed u/s.92CA - HELD THAT:- It is clear that AO had omitted to give the working capital adjustment. We therefore direct the AO to give working capital adjustment of 0.23% as recommended by the TPO. Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;bie DRP erred in law as well as facts in directing the TPO to consider the foreign exchange fluctuation as operating in nature while determining the margin in the case of the taxpayer by applying the same principles as emerging from the orders of ITAT in the case of Sap Labs India Pvt. Ltd. 5 Whether the Id, DRP is justified in directing the TPO to grant risk adjustment without advising any reasonable accurate method in the absence of which the TPC had not provided the same. 03. Grounds 1 and 2 assails exclusion of M/s. E-clerk Services Ltd and Infosys BPO Ltd, from the list of comparables selected by the TPO, for bench marking the pricing of the international transactions of the assessee with the Associated Enterprise ( AE in short). TPO had applied turnover filter of ₹ 200 crores. 04. Facts apropos are that assessee providing data analysis services to its principal in USA called M/s. Zyme Solutions Inc, had filed its return for the impugned assessment year declaring loss of ₹ 5,84,039/-. Assessee had claimed deduction of ₹ 1,63,75,996/- u/s.10A of the Act. Since it had international transactions with its associated en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AME PLI 1 ACCENTIA TECHNOLOGIES LTD 43.06% 2 ACROPETAL TECHNOLOGIES LTD (SEG.) 22.27% 3 E.CLERX SERVICES LTD 55.97% 4 FORTUNE INFOTECH I,TD 22.80% 5 ICRA ONLINE LTD(SEG) 43.39% 6 INFORMED TECHNOLOGIES INDIA LTD 26.15% 7 INFOSYS BPO 31.23% 8 COSMIC GLOBAL LTD 14.97% 9 SUNDARAM BUSINESS SERVICES LTD -12.31% 10 JEEVAN SCIENTIFIC TECHNOLOGY LTD.(SEG.) 21.05% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits. Reliance was placed on a decision of coordinate bench in the case of Capgemini India P. Ltd v. ACIT [ (2014) 147 ITD 330]. As per the Ld. DR, TP study done by the assessee itself was incorrect and the DRP had given a specific finding in this regard. Assessee had in its TP documentation considered the comparables which had turnover in excess of ₹ 200 crores. As per the Ld. DR therefore, turnover filter was not a proper one which could be applied for selection of comparables. 11. Per contra, Ld. AR submitted that application of turnover filter has been accepted by Hon'ble Bombay High Court in the case of CIT v. Pentair Water India P. Ltd [T.A.No.18 of 2015, dt.16.09.2015]. Further according to him, coordinate benches of this Tribunal in the following cases had held that turnover filter as an appropriate filter : M/s.Genisys Integrating Systems (India) P. Ltd v. DCIT [ITA.1231/Bang/2010, dt.05.08.2011] 24/7 Customer.com P. Ltd v. DCIT [[(2012) 28 Taxmann.com 258] M/s. First Advantage Offshore Services P. Ltd [ IT(TP)A No.1086/Bang/2011] M/s. Capital IQ Information Systems (India) P. Ltd [ ITA.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of Wipro Ltd. Is ₹ 939.78 crores while in the case of the Asseessee the turnover is around ₹ 11 crores. Therefore, on the basis of the turnover filter itself this company cannot be regarded to be comparable to the Asseessee company and accordingly, we do not find any infirmity in the finding of CIT(A) while he excluded this company on the turnover criteria following the decision of this tribunal in Sony India (P) Ltd. vs. DCIT, 114 ITD 448 Delhi, E-Gain Communication, 2008 TIOL 282 ITAT (Pune) Deloittee Consulting India Pvt. Ltd. vs. DCIT, ITA No. 1082/Hyd/2010 Genisys Integrating System (India)(P.) Ltd. vs DCIT 53 Sot 159 (Bang) 6. The said findings of the Tribunal in respect of the said three Companies are on the basis of appreciation of evidence on record. We find no infirmity in the said findings of the Tribunal on that count. In fact, the Tribunal has endorsed the views of the CIT Appeals whilst coming to such conclusions. The concurrent findings of facts arrived at by the Authorities below, cannot be re-appreciated by this Court in the present Appeal. 13. In o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. Sony India (P) Ltd. v. Dy. CIT [2008] 114 ITD 448 (Delhi) 4. Dy. CIT v Indo American Jewellery [2010] 41 SOT 1 (Mum.) 5. Philips Software Centre (P.) Lid. v. Asstt. CIT [2008] 26 SOT 226 (Bang.) 6. Asstt. CIT v. NIT [2011] 10 taxmann.com 42 (Delhi) 8.1 He further submitted that size as a criteria for selection of comparables is also recommended by OCED in its TP guidelines. The observation of OCED in para-3.43 of the Chapter on guidelines reads as follows; Size criteria in terms of sales. assets or number of employees: The size of the transaction in absolute value or in proportion to the activities of the parties might affect the relative competitive positions of the buyer and seller and therefore comparability . 8.2 The learned counsel for the assessee submitted that similar observations were also made by ICAI in Para 15.4 of TP guidance Note. He submitted that TPO's range of ₹ 1.00 crore to infinity has resulted in selection of companies like ws Infosys which is having a turnover of ₹ 9,028 cores which is 1,1007 times bigger than the assessee company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business revenue of the assessee was from the billings on its AE abroad for the services rendered by it. Nothing has been brought on record to show that any of the foreign exchange loss / gain had come from any hedging activity or any other line of activity undertaken by the assessee. Unless rebutted a safe presumption can be made that foreign exchange loss / gain arose out of the business activity of the assessee which was entirely providing ITES services to its principal abroad. We cannot say that foreign exchange loss / gain had no nexus with such activity. We are therefore of the view that the DRP took a correct view on this issue. DRP had accepted the submission of the assessee that such gains / losses were closely linked to its business operation did and not relate to any extra ordinary or abnormal events. Grounds 3 and 4 stand dismissed. 18. Vide its ground 5 grievance raised by the DRP directed to grant of risk adjustment without advising a reasonably accurate method for its determination. Assessee in its TP study had not made any adjustment for risk while calculating of PLI. What assessee had mentioned in its TP study with regard to risk adjustment is reprodu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business still there are others which will sustain the business of the tested party. But in case of the taxpayer there being only one client, the entire risk is concentrated on one client, and therefore, if the client is out of business the taxpayer will also be out of business. Earlier the argument given about the country risk was that EU US arc having better credit rating as compared to India. This argument is no longer valid as their credit rating is also on a downward trend. Most of the exports Of services from India are primarily to EU US and therefore in case of uncontrolled comparables also the risk level will be equated. So far as the methods suggested by taxpayers in this regard are concerned, they are statistical methods available in standard books of statistics and financial management. A careful study of these methods would show that in all of them a number of assumptions are made to draw the conclusions. Transfer pricing regulations in India is against any assumption in respect to any adjustment. In support, reference is made to Rule 10B discussed above which speaks of reasonably accurate adjustment. If accurate adjustment cannot be ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions submitted that DRP had given clear guidance to the TPO by referring to decision of Hyderabad Bench of the Tribunal in the case of Hello Soft Pvt. Ltd (supra). 23. We have perused the orders and heard the rival contentions. No doubt, DRP had followed a coordinate bench decision in the case of Inellinet Technologies India P. Ltd v. ITO [ITA No.1237/Bang/2007], in taking a view that single customer risk borne by a tax payer as a competing service provider was equivalent to the market and technical risk borne by the comparables. Nevertheless assessee itself had never made any attempt in its TP study to quantify the risk. On the other hand, assessee itself had mentioned the difficulties of attempting a risk adjustment. We are of the opinion that the DRP was putting the onus on TPO to give a risk adjustment on the PLI, when assessee had never discharged its onus in its TP study. Perceived single party risk is purely hypothetical and since assessee s AE is its holding company, it is in its best interest that work is given to the assessee. It is not that assessee could not have had other client, but it chose to service only its principal. Thus the perceived risk even if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out that Accentia Technologies Ltd. was engaged in the business of medical transcription and coding and had softwares which were being used by the Accentia Technologies Ltd. in serving the end to end results. Thus, functionally amalgamating company and amalgamated companies were different as performing different functions. 17. The effect of amalgamation has been pointed out in the annual accounts and it is merely stated therein that in view of the amalgamation being effective the figures for the year ended 31-3-2010 were inclusive of the figures relating to the amalgamating company and, thus, were not comparable with those of the previous year. 18. Ld. counsel further referred to page 355 of the PB, wherein fixed asset schedule of the said company is contained in which, in the block goodwill/ brand/ IPR an addition of ₹ 19,651,057/- has been shown. Thus, he pointed out that the asset base had substantially increased in the year under consideration and, therefore, this could not be taken as comparable because of the extraordinary event. Ld. counsel further referred to the decision of the ITAT dated 6-7-2015 in the case of Techbook International ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a. It converts data from hard copy or files into XML/SGML/HTML, creating electronic style files and modifying the user interface for CD-ROM delivery. In the process, raw data received from the customers in hard copy/ electronically, is converted into electronic form. Thereafter, the data is arranged and formatted. Thus, it can be said that the assessee is primarily engaged in providing ITES to its associated enterprise (AE). 20. The assessee s business profile has been considered in para 2 of this order and a comparison of the business profile of Techbook International Pvt. Ltd. (supra) with assessee clearly shows that both are providing ITES services to its AEs. Therefore, the finding in Techbook International Pvt. Ltd. (supra), regarding various comparables is applicable to the present set of facts. Therefore, respectfully following the order of the ITAT in the case of Techbooks International Pvt. Ltd. (supra), we direct this comparable to be excluded from the final list of comparables. 28. There is no dispute that assessee was providing ITES to its principal abroad. The profile of M/s. Rampgreen Solutions P. Ltd compares favourably with that of as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctionally comparable at segment level also, as engineering design services are high end services, as considered in other cases. It is further submitted that allocation of expenses between segments is not possible and depreciation was not allocated between the segments. There are extra-ordinary events which impact profit also, as can be seen from the Annual Reports. It is further submitted that this company is not selected in the list of comparables selected in the case of Mercer Consulting (India) Pvt. Ltd. and therefore, selection of the company by the TPO in this case, which is also in similar ITES services, is not proper. 20.1 After considering the rival contentions, we agree with the objections raised by assessee. As seen from the Annual Report, this company is involved in engineering design services and has products also, which makes it functionally not comparable. Even at the segmental level, it provides engineering design services, which was considered as high end by the coordinate bench of the Tribunal in the case of Hyundai Motors India Engineering (supra) in earlier year. Therefore, we are of the opinion that this company cannot be selected as a comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... export sales filter of 75% on sales. Reliance was also placed on the decision of Mumbai bench decision in the case of Vodafone India Services P. Ltd v. ACIT [ITA.7514/Mum/2013, dt.10.12.2014]. 34. Per contra Ld. DR submitted that I C R A was a part of assessee's study and assessee could not turn around and say that it should be excluded. 35. Ad libitum reply of the Ld. AR was that assessee could raise such a pleading considering the decision of Special Bench in the case of DCIT vs Quark Systems Pvt Ltd [42 DTR 414]. 36. We have perused the orders and heard the rival contentions. Filters adopted by the TPO has been mentioned at para 5.1 of his order dt.23.01.2014. Relevant para in so far as it relates to application of export sales filter is reproduced here under : Companies who have expor sales less than 25% of the sales were excluded This has been done primarily to exclude predominantly domestic companies which cannot be compared with taxpayers, having major earnings from exports. This is because economic circumstances of such companies are different. Rule 10B(2) also supports this view. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hether the foreign exchange earnings of ICRA was above or below the limit of 75% was not verified by any of the lower authorities. We are therefore of the opinion that the issue regarding comparability of ICRA Online Ltd, requires a fresh look by the AO / TPO. We set aside this issue back to the file of AO / TPO for consideration afresh so that he can correctly calculate the export sales ratio of the said company to its total revenues for applying the 75% filter. Grounds 7(c)( 7(d) and 7(e) are treated as partly allowed. 40. In support of his ground 7(h) Ld. AR submitted that when rental income was excluded while calculating the PLI of the assessee, corresponding rental expenditure was also required to be excluded. We find that the AO in the assessment done pursuant to the DRP directions had excluded rental income from the business income. As per the assessee it had incurred expenditure of ₹ 23,75,000/- which is relatable to the earning of rental income. We are of the opinion that once rental income is excluded from the business income of the assessee while calculating the PLI of the assessee, as a natural corrolary expenditure incurred for earning such rental ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 154,806,930 Arm s Length Price (ALP) 188,353,691 121.67% of Operating Cost) Price Received 166,532,972 Shortfall being Adjustment u/s 92CA: 21,820,618 43. It is clear that AO had omitted to give the working capital adjustment. We therefore direct the AO to give working capital adjustment of 0.23% as recommended by the TPO. Accordingly ground 7(i) of the assessee stands allowed. 44. Now we take up corporate tax grounds raised by the assessee. Grievance of the assessee is that AO while considering its rental income under the head 'income from other sources' had not reduced the expenditure relatable to such rental income. 45. We have heard the rival counsels. Case of the assessee is that for earning the rental income it had incurred expenditure of ₹ 23,75,000/. Assessee had by itself reduced the rental income from its business head and shown it under the head 'income from other sources' since the rental were ..... X X X X Extracts X X X X X X X X Extracts X X X X
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