TMI Blog2021 (2) TMI 350X X X X Extracts X X X X X X X X Extracts X X X X ..... g, comparability of the assessee has to be made with other companies in identical environment. Therefore, same financial period of both the assessee and the comparable should be considered for comparison. In view of the above facts and circumstances, we direct the learned TPO to compute the margin of this company after taking into consideration the financial results of four quarters, which have been considered in the case of the assessee. The relevant ground of the appeal ground is accordingly allowed for statistical purposes Under ITES Segment inclusion of 'M/s. Vishal Information Technologies Ltd.' in set of comparables - Testing of products and services in the field of the pollution-control are functionally different from the providing marketing support services. For providing testing services higher technical skills and experiences are required whereas support services can be provided using comparatively less technical persons. In view of different nature of services, we hold the company as functionally dissimilar and accordingly direct the Learned AO/TPO to exclude the company from the final set of the comparable. Exclusion of companies being functionally diss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. The Ld. CIT(A) erred on facts and in law in determining the arm's length price of the Appellant's international transactions with its associated enterprises in the Administrative/market support and IT enabled segments in the following manner: 3.1 By upholding the Ld. Transfer Pricing Officer's ( TPO ) approach of applying additional and modified quantitative filters in order to arrive at a set of comparable companies. 3.2 By upholding the Ld. TPO's approach of selecting companies which were functionally not comparable to the Appellant and operated on a different business model under Transactional Net Marginal method ( TNMM ). 3.3 By upholding the Ld. TPO's approach to include companies as comparable despite the fact that such companies had witnessed abnormal margin/growth during the year under consideration. 3.4 By upholding the approach of the Ld. TPO in denying economic adjustment for the difference in risk profile between the comparable companies and the Appellant. 3.5 By upholding the approach of Ld. TPO in selecting the current year (i.e. financial year 2007-08) data for comparability despite the fact that at the time of comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iled its return of income on 30/09/2008 declaring total income of ₹ 1,93,55,507/-, which was selected for the scrutiny assessment. The statutory notices under the Income-tax Act, 1961 (in short 'the Act') were issued and complied with. The Assessing Officer observed international transactions carried out by the assessee with its Associated Enterprises and therefore for determining arm's-length price of those international transactions, he referred the matter to the learned Transfer Pricing Officer (TPO). The Ld. TPO, after providing opportunity to the assessee, proposed transfer pricing adjustment of ₹ 3,57,86,942/- in his order dated 31/10/2011 under section 92CA(3) of the Act. The Ld. Assessing Officer in his order dated 30/01/2012 included the transfer pricing adjustment proposed by the Ld. TPO. Aggrieved with the transfer pricing adjustment, the assessee filed appeal before the Learned CIT(A), who partly allowed the appeal. Aggrieved, both the assessee and the Revenue are before the Income-Tax Appellate Tribunal (in short 'the Tribunal') by way of raising the grounds as reproduced above. 4. In the additional grounds, the assessee has raised tw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10/2011 and order of the Learned CIT(A) was passed on 3/11/2014 whereas the assessee is approaching now in the year 2019 for admitting the additional ground. Accordingly, he submitted that additional ground of the assessee might not be admitted. 4.4. We have heard rival submission of the parties on the issue of additional ground raised. On the issue of exclusion of comparable which was selected by the assessee before the learned TPO, the Tribunal in the case of DCIT Vs. Quark Systems (P) Ltd. (supra) has held as under: 30. Learned special counsel for the Revenue Shri Kapila has vehemently argued that Datamatics was taken as one of the comparables by the taxpayer and no objection to its inclusion was raised before the TPO or before the learned CIT(A) in appeal. Therefore, the taxpayer should not be permitted to raise additional ground and ask for exclusion of the above enterprise in the determination of the average margins. We are unable to accept above contention. In the first place, these are initial years of implementation of transfer pricing legislation in India and taxpayers as well as tax consultants were not fully conversant with this new branch of law when proceedi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it has been found and observed as under: Mr. Brijlal Gupta appearing for the Department pointed out that the assessee itself filed separate returns for the two parts of a single accounting period. The assessee applied for registration for the first period only. The assessment for the second period proceeded as against an unregistered firm. It was, therefore, urged by Mr. Gupta that it is not open to the assessee to urge now that a single assessment under s. 26(1) ought to have been made. Now, there cannot be an estoppel against statute. If in fact the procedure adopted by the ITO was incorrect, the defect is not cured by the attitude taken up by the assessee. 33. In the case of CIT vs. C. Parakh Co. (India) Ltd. (1956) 29 ITR 661 (SC), their Lordships of Supreme Court made the following observations: On the question of the admissibility of the deduction of ₹ 1,23,719, the contention of the appellant is that as the respondent had itself split up the commission of ₹ 3,12,699 paid to the managing agents, and appropriated ₹ 1,23,719 thereof to the profits earned at Karachi and had debited the same with it, it was not entitled to go back upon it, an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... make good faith showing that their transfer pricing is consistent with the arm's length principle regardless of where the burden of proof lies. 36. The aforesaid decisions and guidelines may not be exactly on identical facts before us but they emphatically show that taxpayer is not estopped from pointing out a mistake in the assessment though such mistake is the result of evidence adduced by the taxpayer. 37. When substantial justice and technical considerations are pitted against each other, the cause of substantial justice deserves to be preferred, for the other side cannot claim to have a vested right in injustice being done due to some mistakes on its part. 4.5. This decision of the Tribunal has been further upheld by the Hon'ble High Court of Punjab and Haryana as reported in (2011) 244 CTR 542. 4.6. Relying on the decision of the Tribunal and in the interest of the substantial justice, the issue raised by way of the additional ground deserves to be admitted. Accordingly, the additional ground was admitted and the parties were directed to address on the additional grounds along with the grounds raised in appeals. 5. The ground No. 1 of the appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of support services for computer based testing TNMM OP/TC 91,064,861 2. Provision of marketing support services 31,134,838 3. Provision of back office based IT enabled services 46,184,808 6.2. Further, the assessee selected 12 comparables for the support service for computer based testing and marketing support service segment and in view of the average margin of those comparables based on multiple year data, was worked out at 7.90%. The assessee's margin being higher in both segments, the transactions were treated as at arm's-length. Similarly, in the case of ITeS, seven comparables were chosen by the assessee and their mean margin was worked out at 10.04%, and thus, the transaction was considered at arm's-length. 6.3. The learned TPO though accepted the method adopted by the assessee to benchmark the international transaction, however he rejected the comparability analysis and conducted a fresh benchmarking study on the basis of additional/modified quantitative filters. The Learned TPO rejected few co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mean margin of comparables at 28.16%, computed the arm's-length price of transaction of support services for computer-based testing segment and marketing support service segment and accordingly proposed adjustment of ₹ 1,62,18,949/- and ₹ 61,57,133/- to the segment of computer based testing support services and marketing support services segment respectively. 6.6. The list of the comparables for IT enabled services mentioned at page 93 of Ld. TPO is reproduced as under: Sl. No. Name of comparable OP/TC 1 Accentia Technologies Ltd 40.94 2 Caliber Point Business Solutions Ltd 10.97 3. Cosmic Global Ltd. 23.3 V Eclerx Services Ltd. 65.88 5 HCL Comnet Systems Services Ltd. 37.99 6 Mold-Tek Technologies Ltd 96.66 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bled Services segment: 7.1. The learned Counsel submitted that this company was selected as comparable by the assessee but being contested before the Tribunal for its exclusion on the ground of different business model. The learned Counsel submitted that the company is functionally not comparable as main services provided by it are translation services. He further submitted that vendor payment of the company constitute 60.17% of the total cost and thus business model of the company is of outsourcing,. The assessee does not outsource its function and carries out the ITeS services through its own employees. The Learned Counsel submitted that the company has been held incomparable to ITeS service provider on account of outsourcing model in following judicial pronouncement: BNY Mellon International Operations V/s PCIT (ITA No. 1226/2015)- Bombay High Court M/s. Global E- Business Operations V/s PCIT (ITA No. 700/2017)- Karnataka High Court M/s. Venture India Private V/s ACIT (ITA No. 1788/PUN/2014)- AY 2009-10 UT Starcom Inc. V/s DDIT (ITA No. 1829/Del/2014)- AY 2009-10 Mercer Consulting (India) Pvt. Ltd. [ITA No. 966/Del/2014] [AY 2009-10] dated 06 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing authority under section 133(6) of the Act. 7.5. Further, the assessee has stated that the company work on outsource model as against the assessee who provide services to the AEs through its own employees. The Learned DR on the other hand has objected for assuming the outsource model only on the basis of one entry of translation charges paid of ₹ 2,86,29,348/- out of total operating cost of ₹ 4,75,83,209/-. We have perused the Annual Report of the company and from schedule 14-Significant Accounting Policies (page 385 of Annual Report paper book) we find as follows: 1.6 The Company follows the procedure of deploying personnel as Transcriptionists and checkers for translation work only after imparting an intensive training programme. In the opinion of the Company, the intensive training programme is vital and necessary, without which the personnel will not be able to achieve the necessary competence for carrying out the operations. Such personnel after the training programme was absorbed by the Company as employees and the entire expenditure incurred on such personnel hithertofore accounted as Deferred Revenue Expenditure is now accounted as Revenue Expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee has only challenged inclusion of 'M/s. Vishal Information Technologies Ltd.' in set of comparables. 9.1. The Learned Counsel of the assessee submitted that the company subcontracts majority of its work to 3rd party vendors. He submitted that vendor payments approximate to 85.58% of the total cost incurred by the company and thus, it needs to be excluded on the ground of business model. He submitted that company has been rejected as comparable to ITeS companies in following decisions: Rampgreen Solutions Private Limited [ITA 102/2015] - Delhi HC - please refer para 8 BNY Mellon International Operations V/s PCIT (ITA No. 1226/2015)-High Court Everest Business Advisory India Private Limited V/s DCIT (ITA No. 43/Del/2013)- AY 2007-08 M/s. BA Continuum India Private Limited V/s ACIT (ITA No. 1144/Hyd/2014)- AY 2008-09 M/s. Symphony Marketing Solutions India Private Limited V/s ITO (IT (PA) No. 1316/Bang/2012)- AY 2008-09 PTC Software (India) Pvt. Ltd. (ITA NO. 336/PN/2014) for AY (2009-10) dated 31.10.2014 M/s. Capital IQ Information Systems (India) Pvt. Ltd. (ITA No. 1961/Hyd/2011; AY 2007-08; Paragraph 17 and 23 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in accordance with law. 9.3. In the ground No. 3.1 to 3.4 of the appeal, under marketing support service and other support service segment, the assessee has challenged inclusion of one comparable, namely, M/s. Choksi Laboratories Ltd. 9.4. The learned Counsel submitted that this company is engaged in lab testing of products for clients or as a regulatory requirement for pharmaceuticals, food and agriculture products, construction materials, chemicals etc. He further submitted that the company also provides services in the field of pollution-control and has been certified by several regulatory bodies and also accredited by the National Accreditation Board for Testing and Calibration Laboratories. He further submitted that company is highly capital intensive company, employing net fixed assets amounting to 148% of the operating income as compared to the assessee which deploys routing tangible constituting only 6.98% of the operating income. He further submitted that company has been rejected in following cases as comparable to ITeS segment: Yum Restaurants India Private Limited V/s ITO (ITA No. 6168/Del/2012)-AY 2008-09 M/s. Brown Forman World Wide LLC V/s DDIT ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... echnical persons. In view of different nature of services, we hold the company as functionally dissimilar and accordingly direct the Learned AO/TPO to exclude the company from the final set of the comparable. 9.8. The grounds No. 3.1 to 3.4 of the appeal of the assessee are partly allowed for statistical purposes. ITA No. 397/Del./2015 (Revenue's Appeal) 10. Now, we take up the appeal of the Revenue. In ground No. 1 exclusion of 'Saket Project Ltd.' has been challenged. 10.1. The learned DR submitted that the TPO has already considered segment result and, therefore, Ld. CIT(A) is not justified in excluding the company on the ground of functional dissimilarity. 10.2. The Learned Counsel of the assessee, on the other hand, relied on the finding of the Learned CIT(A) and submitted that TPO has taken the event management division for comparison which constitutes for only 25% of the business and has 159% profit. He further challenged the accuracy of allocation of the expenses to various segments by the company. He further submitted that this company has been excluded in the case of marketing support service provider in following decisions: Yum Restau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onals cannot be compared with the function of providing marketing support. The Ld. CIT(A) has also followed finding of the Tribunal in the case of Premier exploration services private limited (supra) and Nortel networks India private limited (supra), where the company has been rejected on the ground of functional dissimilarity. In view of the above, we do not find any infirmity in the finding of the Ld. CIT(A) on the issue in dispute and accordingly we uphold the same. The ground No. 1 of the appeal of the Revenue is accordingly dismissed. 11. In ground No. 2, the Revenue has challenged exclusion of 'Wapcos Limited'. In ground No. 3 exclusion of 'Rites Limited' has been challenged by the Revenue. 11.1. The learned DR submitted that both the companies have been excluded on the ground of public sector undertaking. According to him if companies are functionally similar to the assessee, same should not be excluded merely on the ground of being public sector companies. 11.2. On the contrary, the learned Counsel of the assessee submitted that M/s. Wapcos Limited in addition to being a government-owned company, functionally not comparable as it provides consultanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... end engineering solutions to their clients who are not their parent company. Hence the aforesaid PSUs are functionally very different from the appellant company. (ii) On the basis of functional dissimilarity, RITES Ltd. and WAPCOS LTD have been rejected as comparables in the case of companies providing marketing and support services by the Hon'ble ITAT in a number of cases. In the case of DCIT Vs MCI Com I Ltd. 25 taxmann.com 520,(Del)(2012) it was held as under: The view of the first appellate authority that UIL, Rites, Wapcos and TCE are engineering companies and provide end-to-end solutions and whereas the assessee company provides marketing support services to the parent company, which is in the nature of support service and hence not functionally comparable, is to be agreed with. She rightly concluded that the risk profile is vastly different and hence on this count also they are not comparable. This factual conclusions are not disputed by the department. On the basis of the aforesaid judgment a similar view was taken by Hon'ble ITAT Delhi in the case of H M Hennes and Mauritz India (P)Ltd Vs DCIT (ITA No. 4704 of 2012) (iii). In a more recent jud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Accentia as a comparable on account of the following reasons: 1. Extraordinary events in the form of merger of 4 companies with Accentia, which took place during the year and had a considerable impact on its profitability and hence OP/TC. While the turnover increased by 75% in FY 2007-08 over the immediately preceding year, the profits increased by 23% during the corresponding period. Several prominent decisions relied upon by the appellant rule out a company being used as a comparable in a year in which such extraordinary events have taken place. (Capital IQ Information Systems (India) Pvt. Ltd. [ITA No. 1961/Hyd/2011; AY 2007-08]; M/s. Market Tools Research Pvt. Ltd.[ITA No. 1811/Hyd/2012; AY 2008-09). (ii). Functionally, there is a major difference between the two sets of companies. Accentia earns revenue from various sources viz. Software Development Implementation Medical Transcription and Billing . Coding. However, its operations have been classified under a single segment namely Healthcare Receivables Management and no segmental information has been provided by it in its annual report. Hence I hold that Accentia should not have been used as a comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the concerned company is engaged in providing Knowledge Process Outsourcing(KPO) Services. On considering the objections of the assessee in relation to this company, we accept the contention of the assessee that this company cannot be taken as a comparable both for the reasons that it was having supernormal profit and it is engaged in providing KPO services, which is distinct from the nature of services provided by the assessee. We are of the view that in the light of the decision of the Hyderabad Bench referred to above, this company cannot be regarded as a comparable for the reason that it was functionally different. Hence on the basis of the aforesaid arguments, I hold that E-clerx should not have been used as a comparable by the TPO. This comparable is accordingly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arable company, I hold that whereas the turnover of HCL was 495 crores, the appellant's turnover was hardly 4.6 crores. As has been rightly held in the cases of Market Tools Research(supra), Capital IQ information System India(P) Ltd. Vs ACIT(supra)CSR India(P) Ltd. Vs ITO (2013) 31 taxmann.com 265(Bang-Trib) and Act is Advisers(P) Ltd. Vs DCIT (Delhi), the TPO should not have considered HCL Comnet System as a comparable on account of these reasons. Thus I hold that the TPO erred in including HCL as a comparable and it should thus be excluded from the list of comparables. 14.4. We do not agree with the finding of the Ld. CIT(A) on the issue in dispute. The Learned CIT(A) has clubbed the transaction of sale, purchase, payment for facilities, management contracts etc. and then worked out ratio of these transaction to sales. The said ratio has been worked out to 26.44%. In our opinion, if total related party transactions have to be compared, then same should be compared with total transaction of purchase and sales etc. carried out by the assessee. Comparing the total related party transaction with the sales reflect a distorted view of the measure of related party impact on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal set of the comparables observing as under: (c) I have considered the facts of the case and gone through the submissions of the appellant. The following arguments emerge out of the facts of the case and appellant's submissions which are in support of excluding the company from the list of comparables. (i).This was an exceptional year since there was merger/demerger on account of which supernormal profits accrued to the company. (ii). On account of exceptional events during the year, companies have been excluded as comparables by the Hon'ble HAT in a number of cases. In the case of Capital IQ Vs DCIT(supra), on the issue of including Mold Tech as a comparable it was held as under: On careful consideration of the submissions of the assessee we find that the DRP, as already stated earlier, in the proceedings for the assessment year 2008-09 has accepted the assessee's contention that this company cannot be treated as comparable because of exceptional financial result due to merger/demerger. In view of the aforesaid, we accept the assessee's contention that this company cannot be treated as comparable. That apart, it is also a fact that this compa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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