TMI Blog2018 (5) TMI 2122X X X X Extracts X X X X X X X X Extracts X X X X ..... file of the AO/TPO to be adjudicated in accordance with law after providing due and reasonable opportunity of being heard to the assessee. - ITA No. 1423/Del/2014 - - - Dated:- 18-5-2018 - Sh. N. K. Saini, AM and Sh. Sudhanshu Srivastava, JM Assessee by : Sh. Sachit Jolly, Adv. Revenue by : Sh. Sanjay I. Bara, CIT DR ORDER Per N. K. Saini, AM: This is an appeal by the assessee against the order dated 09.01.2014 passed by the AO u/s 143(3) r.w.s. 144C of the Income Tax Act, 1961 (hereinafter referred to as the Act). 2. Following grounds have been raised in this appeal: 1. That on the facts and circumstances of the case, and in law; the Assessment Order passed in pursuance to the directions issued by the Learned Dispute Resolution Panel ('Ld. DRP: ) is a vitiated order as the Ld. DRP erred in confirming the addition made by the Ld. Assessing Officer ('AO') to the appellant's income. 2. The Ld. AO/TPO erred both on facts and in law in confirming the addition of Rs.3,78,55,211 by holding that the appellant's international related party transactions pertaining to the provision information technology enabled and financial supp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st data that was available as on the date of preparing the TP documentation for comparable companies while determining arm's length price; thereby ignoring the principle of 'impossibility of performance ; 2.10 disregarding judicial pronouncements in India while undertaking the TP adjustment. 3. That the Ld. AO grossly erred on facts and in law in disallowing an amount of Rs. 63,207 on account of being 0.5% of the average value of investment under section 14A of the Income tax Act, 1961 ( Act ) read with Rule 8D of Income tax Rules, 1962 ( Rules '). 4. That the Ld. AO grossly erred on facts and in law in making an addition under section 14A of the Act without recording satisfaction in accordance with sub section (2) of section 14A of the Act, that expenditure has been incurred by the appellant for earning exempt income. 5. That the Ld. AO grossly erred on facts in making an addition under section 14A of the Act even where own funds have been used by the appellant for making investments. 6. That the Ld. AO erred on facts and in law in levying and computing interest under section 234B of the Act. 7. That the Ld. AO erred on facts and in law in initiating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liable evidence to prove that the data for preceding two years revealed facts which could have an influence on the determination of the ALP. The TPO was of the view that the use of the data pertaining to the two earlier years was not justified, he accepted only two comparables selected by the assessee, namely, M/s Aditya Birla Minacs Worldwide Ltd. and M/s Microgenetic Systems Ltd. The TPO also selected four new comparables and worked out the average of OP/OC at 30.16% as under: Sl. No. Comparable OP/OC 1. AcroPetal Tech (Segment) 21.37% 2. Aditya Birla Minacs Worldwide Ltd. 1.71% 3. Coral Hub 36.93% 4. Cosmic Global 50.70% 5. eClerx Services 47.00% 6. Microgenetic Systems ltd. 23.25% Average 30.16% 7. The TPO proposed an adjustment of Rs.4,43, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el of competition, the size of the market, cost advantage differ in the domestic market vis-a-vis with the exports and the incentives differ for exporters vis-a-vis with the domestic players, a predominantly domestic company in the service sector cannot be compared with the taxpayer who is mainly a IT Enabled Service provider. It may be mentioned that the operating market is one of the influencing factor in determining the profitability but not the sole factor. Secondly, the margin is not the determining factor in applying this filter. As there are major differences in pricing, markets etc. these differences would influence the prices in the domestic market. Pricing is determined by the market forces and it is the equilibrium point where the willingness to pay and capability to deliver the services. In the case of export market, the pricing is determined by what the company located in US or other similarly developed countries are willing to pay. This would be determined by the cost arbitrage between India and the US or other similarly developed countries. In the case of domestic market, as the cost arbitrage is not available, the willingness to pay for services is decided by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hereafter, the AO passed the draft assessment order against which the assessee raised objection before the ld. DRP and stated that M/s R. Systems India Ltd. may be included since it is functionally similar and M/s Spanco Ltd. (BPO Seg) also to be included since the consolidated financials of this company were available. The ld. DRP did not accept the contention of the assessee for including the above two comparables. The assessee also objected the inclusion of comparables namely, M/s Cosmic Global Ltd. on the basis of high growth/volatility, M/s Eclerx Services Ltd. being functionally different having abnormal high margin/growth/volatility comparison of turnover, M/s Coral Hub Ltd. having high growth and M/s Acropetal Technologies Ltd. being functionally different. However, the ld. DRP did not find merit in the submission of the assessee for exclusion of the aforesaid four comparables. Since, the ld. DRP rejected the objections of the assessee. The AO made an addition of Rs.3,78,55,211/- being difference between the arm s length price. 13. Now the assessee is in appeal. The ld. Counsel for the assessee submitted that M/s Coral Hub Ltd. M/s Eclerx Services Ltd., M/s Cosmic Global ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luded. There can be no estoppel against the provisions of the Act. Extending this proposition further to the context of the transfer pricing, if the assessee fails to report an otherwise comparable case, then the TPO is obliged to include it in the list of comparables, and in the same manner, if the assessee wrongly reported an incomparable case as comparable in its TP study and then later on claims that it should be excluded then, there should be nothing to forbid the assessee from claiming so, provided the TPO is satisfied that the case so originally reported as comparable is, in fact, not comparable. The Special Bench of the Tribunal in DCIT vs. Quark Systems Pvt. Ltd. (2010) 132 TTJ (Chd) (SB) 1 has also held that a case which was included by the assessee and also by the TPO in the list of comparables at the time of computing ALP, can be excluded by the Tribunal if the assessee proves that the same was wrongly included. 12.3. Reverting to the facts of the extant case, we find that the position as obtaining in the present case is rather simple inasmuch as the assessee, having originally included this case in the list of comparables, made a categorical claim before the TPO for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in case said comparables were not included in the TP study, the margins shown by the assessee would be at arm s length. The first comparable referred to by the learned Authorized Representative for the assessee was M/s. Vishal Information Technologies Ltd. The said company was providing IT enabled services and was also engaged in other diversified activities. Further, it has outsourced its services to third party vendor and acted as intermediary between the final customer and the vendor. The assessee on the other hand was engaged in the running of a call centre and was providing technical support to its AEs. We find that the Tribunal in assessee s own case relating to assessment year 2006-07 in ITA No.1346/PN/2010 and in assessment year 2007-08 in ITA No.1605/PN/2011 had excluded the said comparables observing as under: 30. The next point raised by the assessee is against the inclusion of Vishal Information Technologies Ltd., appearing at Item (10) in the Tabulation in para 25 as a comparable case. The TPO has discussed the issue in para 6.9.6. of the order. As per the TPO, the said concern is functionally comparable to the IT-Enabled services segment of the assessee and for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n as sought out to be brought out by the assessee. Considering the aforesaid, we therefore, find that the assessee was justified in ascertaining that the said concern be excluded from the list of comparables for the reasons canvassed. Thus, on this aspect assessee succeeds. 46. The Tribunal in the assessee s own case had held that the said concern was found to be operating in different functional environment and the same was excluded for the purpose of comparability analysis. Following the ratio laid down by the Tribunal in assessee s own case in assessment years 2006-07 and 2007-08 (supra), we uphold the plea of the assessee in excluding the margins of the said concern M/s. Vishal Technologies Ltd. 48. The next objection of the assessee was that with regard to inclusion of Eclerx Services Ltd. which admittedly was engaged in providing KPO services i.e. Knowledge Process Outsourcing, whereas the assessee was engaged in BPO services. The Special Bench of the Tribunal in the case of Maersk Global Centres (India) Pvt. Ltd. (supra) vide order dated 21.08.2014 had excluded the said company as a comparable while determining the margins under ITES segments. The Special ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cluded the said comparable on the ground that this company has outs sourced its considerable portion of its ITES business, whereas the assessee is carrying out entire operation by itself. Similarly in A.Y. 2006-07 also the Tribunal has excluded the said comparable on similar ground. In A.Y. 2008-09, DRP itself has directed the AO not to include Coral Hubs as a comparable company, which fact has been noted by the Special Bench in assessee s own case in para 13 of the order. Thus, consistent with the view taken in the earlier years and there being no change in facts and circumstances in this year, we accept the assessee s contention that the Coral Hubs Ltd. (Vishal Information Technologies Ltd.) has to be excluded from the list of final comparables. Accordingly, Coral Hubs Ltd is directed to be excluded. 11. Regarding to M/s. Eclerx Services Ltd., it has been submitted by the Ld. Counsel that Hon ble Special Bench in A.Y. 2008-09 has directed the TPO to exclude this company from the list of final comparables. The relevant discussion and finding regarding M/s. Eclerx Services Ltd. by the Hon ble Special Bench is as under:- In so far as M/s. Eclerx Services Limited is concerned, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of determining ALP of the transactions of the assessee company with its AEs. We, therefore, direct that these two entities be excluded from the list of 10 comparables finally taken by the AO/TPO as per the direction of the DRP. 18. So, respectfully following the aforesaid referred to order of the Co-ordinate Benches, we direct the AP/TPO to exclude M/s Coral Hub Ltd., Cosmic Global and eClerx Services from the list of the comparable while determining the OP/OC for the purposes of arm s length price. 19. As regards to Ground No. 2.8 relating to computation of operating profit margins of the comparables. 20. The ld. Counsel for the assessee referred to page no. 158 of the appeal folder and submitted that the TPO considered a non-operating expenses as operating while working out the operating cost base of the assessee without providing any comment on the operating margin computed by the assessee and accordingly computed an inappropriate cost base. It was also stated that the objection was raised before the ld. DRP also but no findings were given on this issue by the ld. DRP. 21. In his rival submissions, the ld. CIT DR although supported the orders of the authorit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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