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TMI Blog2018 (5) TMI 2122X X X X Extracts X X X X X X X X Extracts X X X X ..... rt services do not satisfy the arm's length principle as envisaged under the Income Tax Act, 1961 ('The Act') and in doing so the Ld. AO/TPO has grossly erred in: 2.1 disregarding the arm's length price ('ALP') and the methodical benchmarking process carried out by the appellant in the Transfer Pricing ('TP') documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('Rules'); and in particular modifying/ rejecting the filters applied by the appellant; 2.2 rejecting comparability analysis in the TP documentation and in conducting a fresh comparability analysis based on application of additional filters in an arbitrary manner while determining the arm's length price; 2.3 including companies in the comparability analysis which do not satisfy the test of comparability in terms of functions performed, assets employed and risks assumed; 2.4 resorting to arbitrary rejection of low profit/loss making companies based on erroneous and inconsistent reasons; 2.5 including companies having abnormal/volatile margins in the final comparables' set for benchmarking a low risk captive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y proceedings against the Appellant under section 271(1)(c) of the Act. The above grounds are without prejudice to each other. The appellant craves leave to alter, amend or withdraw all or any of the grounds herein or add any further grounds as may be considered necessary either before or during the hearing." 3. Ground No. 1 is general in nature and ground no. 7 is raised pre-maturely, so these grounds do not require any comment on our part. 4. Vide ground nos. 2 to 2.10, the grievance of the assessee relates to the confirmation of addition of Rs.3,78,55,211/- made by the AO on account of arm's length price. 5. Facts of the case related to this issue in brief are that the assessee was engaged in business of manufacturing of portable generating sets, I.C. Engines, Water Pumping sets and manufacture and processing of pressure Die-Casting parts. The assessee filed the return of income on 29.09.2009 declaring an income of Rs.13,98,57,008/-. Later on, the case was selected for scrutiny. During the course of assessment proceedings, the AO noticed that the assessee had undertaken international transactions with its Associated Enterprises (AEs) and the value of those transactions wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al data of the companies for the financial year ended March 31, 2006 and prior years as per limitations imposed by the statutory provisions. The assessee also objected on the applicability of less than Rs. 1 crore filter and submitted that turnover criteria should not be applicable in case of an entity which operates on a cost plus pricing model. It was stated that the TPO had applied this filter to eliminate companies with export turnover less than 75%. 9. The TPO after considering the submissions of the assessee referred to the revised OECD guidelines, 2010 regarding economic circumstances for comparability and rejected the objections raised by the assessee by observing as under: "The domestic companies cannot be treated as comparable to the taxpayer who is wholly or mainly export oriented because: a) conditions prevailing in the export and domestic market in which the respective parties to the transactions operate are different . b) geographical locations(domestic and export) are different c) size of the markets(domestic and export) to which the companies cater to are different d) cost of labour and capital in the markets(domestic and export) are different e) overal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... markets, and other prevailing market conditions like level of competition etc." 10. The reliance was placed on the following case laws: * M/s Chiron Behring Vaccines Pvt. Ltd. (2011-TII-30- ITAT-Mum-TP) * M/s CRM Services India (P) Ltd. (2011-TII-86-ITATDel- TP) * M/s Deloitte Consulting India Pvt. Ltd. in ITA No. 1082/Hyd/2010 * M/s Indo American Jewellery Ltd. (2010-TII-24-ITATMum- TP) * M/s Ranbaxy India 299 ITR (AT) 175 (Del.) 11. The TPO finally determined the arm's length price at Rs.22,80,33,381/- as against Rs.25,24,76,890/- determined by the assessee and directed the AO to enhance the income by Rs.3,78,55,211/- giving the calculation as under: Sl. No. Comparable OP/OC 1. AcroPetal Tech (Segment) 21.30% 2. Aditya Birla Minacs Worldwide Ltd. 0.50% 3. Coral Hub 36.93% 4. Cosmic Global 48.20% 5. eClerx Services 47.00% 6. Microgenetic Systems ltd. 9.98% Average 27.32% The arm's length price of the international transaction related to the provision of IT enabled services is recalculated as below: Operational Cost 228,033,381 Arm's Length Price at a Margin of 27.32% 290,332,101 Price Received 252,476,890 Proposed Adjustment u/s 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to exclude the Coral Hub Ltd. and the relevant findings are given in paras 12.1 to 12.3 which read as under: "12.1. This case was earlier included by the assessee in the list of comparables in the transfer pricing study by considering multiple-year data. However, when the TPO required the assessee to furnish data of comparables for the current year alone, the assessee requested for the exclusion of this case from the list of comparables. The ld. DR opposed this contention by urging that the assessee cannot be allowed to resile from its original stand. 12.2. We are disinclined to sustain the legal objection taken by the ld. DR that the assessee should be prohibited from taking a stand contrary to the one which was taken at the stage of the TP study or during the course of proceedings before the authorities below. It goes without saying that the object of assessment is to determine the income in respect of which the assessee is rightly chargeable to tax. As the income not originally offered for taxation, if otherwise chargeable, is required to be included in the total income, in the same breath, any income wrongly included in the total income, which is not otherwise chargeable, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1). In the later case also, the Tribunal held that the case of Vishal Information Technologies Ltd. or Coral Hub Ltd. was not includible in the list of comparables because of major outsourcing. Since the facts of the instant case are on all fours with these two cases, we are of the considered opinion that this case is required to be excluded from the list of comparables. We order accordingly." 16. Similarly, the ITAT Pune Bench 'A', Pune directed to exclude M/s Vishal Information Technologies Ltd. (now M/s Coral Hub Ltd.) and M/s Eclerx Services Ltd. and M/s Cosmic Global Ltd. vide order dated 31.10.2014 in ITA No. 336/PN/2014 for the assessment year 2009-10 by observing as under: "45. We have heard the rival contentions and perused the record. In The TP study carried out by the TPO in the ITES segments, fresh search criteria were applied by the TPO and list of comparables which were not selected by the assessee were picked up in the TP study and the margins of the said comparables were applied to determine the arm's length price of the transactions of the assessee in ITES segments. The assessee was aggrieved by the selection of the said comparables and the plea of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he said concern is functionally dissimilar to that of the IT-Enabled services segment of the assessee. It has also been argued that the said concern has earned supernormal profits as high as 59.19% and therefore, the same is not includible in the list of comparables so as to avoid skewing of the comparability analysis. On the other hand, the stand of the Revenue as brought out by the TPO in para 6.9.6. of the order is to the effect that the said concern being categorized as an IT-Enabled services concern, the same is liable to be included. 31. We have carefully considered the rival submissions on this aspect. At the outset, we may refer to page 810 of the Paper book, wherein the Notes to Accounts for the year ended 31.3.2007 of the said concern have been placed. As per the available information, the said concern has related party transactions as reported by the concern at para 7 of the said Notes at 86.92%, which breaches the RPT filter. Furthermore, the functional profile of the said concern brought out by the assessee also reveals differentiation in the activity profile. The TPO, in our view, has not appreciated the qualitative difference in the functions performed by the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Tribunal for the first time. Accordingly, we hold that the assessee at this point can raise the said issue. Now, the second part of the objection was that the company had outsourced its vendor and was making high vendor payments as compared to the sales and hence was not comparable. While adjudicating the exclusion of M/s. Vishal Information Technologies Ltd., we have in paras hereinabove already considered this aspect of the companies outsourcing to vendors and held M/s. Vishal Information Technologies Ltd. to be not functionally comparable. Following the same parity of reasoning, we hold that M/s. Cosmic Global Ltd. is not functionally comparable." 17. On the identical issue, the Co-ordinate Bench of the ITAT Mumbai Bench 'K', Mumbai in the case of M/s Maersk Global Service Centres (India) Pvt. Ltd. Vs DCIT, Circle-6(3), Mumbai (supra) directed to exclude M/s Coral Hub Ltd., M/s Eclerx Services Ltd. and held as under: "10. First of all, we shall discuss Vishal Information Technologies Ltd. now known as Coral Hubs Ltd. This company has been subject matter of dispute in assessee's case, whether to be included as comparable or not, since earlier years. In A.Y. 2005-06, the Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing services. It also provides tailored process outsourcing and management services along with a multitude of data aggregation, mining and maintenance services. It is claimed that the company has a team dedicated t development automation tools to support service delivery. These software automation tools increase productivity, allowing customers to benefit from further cost saving and output gains with better control over quality. Keeping in view the nature of services rendered by M/s. eClerx Services Pvt. Ltd. and its functional profile, we are of the view that this company is also mainly engaged in providing high end services involving specialized knowledge and domain expertise in the field and the same cannot be compared with the assessee company which is mainly engaged in providing low end services to the group concerns." 83. For the reasons given above, we are of the view that if the functions actually performed by the assessee company for its AEs are compared with the functional profile of M/s. eClerx Services Pvt. Ltd. and Mold-Tec Technologies Ltd., it is difficult to find out any relatively equal degree of comparability and the said entities cannot be taken as comparables ..... X X X X Extracts X X X X X X X X Extracts X X X X
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