Case Law Details
In this view of the matter we set aside the issue of determining the transfer pricing in accordance with the directions in respect of specific comparables referred to above as well as taking into consideration the following:
(a) The companies which are functionally dissimilar unless segmental results in respect of comparable line of activity available.
(b) In case of comparable companies foreign exchange loss or gain have been taken into account in computing the profit, in the case of assessee also the foreign exchange gain or loss should be taken into account in determining the overall profit.
(c) All facts which impact the financial result of comparable companies should be taken into account and reasonable accurate adjustment should be made for the same. In this connection the rates of depreciation adopted by the assessee are significantly different from (straight line as compared with WTP; higher rate than that prescribed in schedule VI) those adopted by the comparable companies suitable adjustment for the different has to be made or the profit before depreciation may be considered.
(d) Companies having super normal profit may have to be examined further to determine the reason for the extra ordinary profits.
(e) Companies whose employee or directors are involved in fraud should not be accepted as the financial results are not reliable.
(f) Companies having the turnover of less than Rs. one crore or more than Rs.200 crores should not be taken as comparables.
ITAT HYDERABAD BENCH ‘B’
Market Tools Research (P.) Ltd.
Vs.
Assistant Commissioner of Income-tax
IT Appeal No. 2066 (Hyd.) of 2011
[ASSESSMENT YEAR 2007-08]
Date of Pronouncement – 31.01.2013
ORDER
Smt. Asha Vijayaraghavan, Judicial Member – This appeal preferred by the assessee is directed against the order of the Dispute Resolution Panel, Hyderabad dated 16th September, 2011 for the assessment year 2007-08.
2. The facts of the case are during the assessment year 2007-08 the assessee company had entered into following international transactions with the Associate Enterprises with Market Tools Inc:
• Provision of IT enabled back office services; and
• Reimbursement of expenses
3. The Learned Transfer Pricing Officer (‘Ld TPO’) carried out an adjustment to the Assessee’s International transaction of IT enabled back office services provided to its AEs.
4. The services are in the nature of back end support which includes survey report designing, survey data programming, data processing etc. so as to support the market research business of its AE i.e. Service Agreement.
5. In the TP Study the assessee adopted Transactional Net Margin Method (‘TNMM”) as the Most Appropriate Method (‘MAM’) for determining the arm’s length price ALP. The assessee identified 12 comparable companies which according to them were functionally comparable. The assessee arrived at the average of the profit level indicator being operating profit / total cost (OP/TC) for the comparables at 15.99%. As the assessee’s margin of OP/TC was 19.99% the assessee submitted that there is no necessity for making any adjustment. However, the TPO selected 27 companies as comparable companies and decided on the mark-up to 30.21%. The TPO further added 0.94% towards working capital adjustment and arrived @ 31.15%. Consequently the TPO recommended the adjustment to Rs. 1,97,35,890/-.
6. The AO passed draft assessment order based on the adjustment recommended by the TPO. Aggrieved the assessee filed an application before the Dispute Resolution Panel agitating the various comparables as well as the filters adopted by the TPO.
7. The DRP after considering various objections of the assessee determined the mean of all comparables @ 29.16% to 24.15%. While arriving at, DRP rejected 2 companies viz. Coral Hub Ltd (Vishal Information Technologies) & Mold Tek Technologies Ltd has not been comparable with the business of the assessee. Therefore the arithmetic mean of PLI of the comparable companies taken by the TPO @ 29.16% came down to 24.15%. Aggrieved the assessee is on appeal before us.
8. The assessee raised various grounds of appeal regarding the comparables as well as the filters applied. Out of the 20 comparables taken by the TPO the DRP had excluded the two comparables viz. Coral Hub Ltd (Vishal Information Technologies) & Mold Tek Technologies Ltd. Out of the balance 18, the assessee had objected to specifically the following comparables:
Eclerx Services Ltd. – We find that comparability of this company has been dealt with in detail in the case of Capital IQ Information systems (India) (P.) Ltd v. Dy. CIT [2012] 26 taxmann.com 31 (Hyd.) for the AY 2007-08 at para 14 & 15 they have held that Eclerx Services Ltd cannot be taken into account in view of their extra ordinary profits and that company was engaged with Knowledge Process Out Sourcing business which is distinct and different from the line of nature of activities of the assessee. Hence this company should be excluded while determining ALP.
9. The next objection is regarding inclusion of Infosys BPO Ltd and Wipro Ltd (Seg.). As these companies are giants in their own fields and activities has been vide in the area of software and BPO segment they cannot be taken as comparable to the assessee. In view of the huge turnover also they cannot be compared with the assessee whose turnover is very small. The Co-ordinate Bench in the case of Capital IQ Information systems (India) (P) Ltd (supra) para 20 & 21 have directed exclusion of companies whose turnover is more than Rs. 200 crores. Following the same we hold that Infosis BPO and Wipro Ltd (Seg) have to be excluded from the list of comparable companies. For the same reason HCL Comnet Systems & Services Ltd (Seg) should also be excluded from the line of comparables while computing ALP.
10. The assessee also objects the inclusion of Maple E-solutions Ltd and Triton Corporation Ltd since the Directors were involved in fraud. We find that in the case of Capital IQ Information systems (India) (P.) Ltd (supra) it has been held that these two companies have to be excluded from the line of comparable on the ground that the Directors were involved in fraud and hence the financials of these companies are unreliable.
11. In this view of the matter we set aside the issue of determining the transfer pricing in accordance with the directions in respect of specific comparables referred to above as well as taking into consideration the following:
(a) The companies which are functionally dissimilar unless segmental results in respect of comparable line of activity available.
(b) In case of comparable companies foreign exchange loss or gain have been taken into account in computing the profit, in the case of assessee also the foreign exchange gain or loss should be taken into account in determining the overall profit.
(c) All facts which impact the financial result of comparable companies should be taken into account and reasonable accurate adjustment should be made for the same. In this connection the rates of depreciation adopted by the assessee are significantly different from (straight line as compared with WTP; higher rate than that prescribed in schedule VI) those adopted by the comparable companies suitable adjustment for the different has to be made or the profit before depreciation may be considered.
(d) Companies having super normal profit may have to be examined further to determine the reason for the extra ordinary profits.
(e) Companies whose employee or directors are involved in fraud should not be accepted as the financial results are not reliable.
(f) Companies having the turnover of less than Rs. one crore or more than Rs.200 crores should not be taken as comparables.
12. In view of the above we set aside the orders of DRP as well as the assessment order passed u/s.143(3) and 144C and restore the matter to the files of TPO who shall determine the ALP afresh in the light of our observations and directions herein above.
13. The next issue is regarding computation of deduction u/s.10A. The AO excluded communication and circuit charges of Rs.20,18,437, telephone charges Rs.12,68,464, reducing reimbursement of internet charges and cell phone charges to the employees of the company of Rs.6,98,464 from the export turnover while computing the deduction u/s.10A of the act.
14. We find that the telephone charges of Rs.12,68,464/-, reimbursement of internet charges and cell phone charges to the employees of Rs.6,98,464/- are merely expenditure incurred in the normal course of the business. They do not fall under the items excluded under explanation to 10A defining the export turnover. Explanation 2 to 10A excludes from the export turnover freight, telecommunication charges, insurance attributable to delivery of articles or computer software outside India. In the present case the telephone charges and reimbursement of internet and cell phone charges to the employees will not fall under the above exclusionary items. However, as regards the communication and circuit charges of Rs. 20,18,437/- we hold, following the decision of Karnataka High Court in the case of (i) CIT v. Tata Elxsi Ltd. [2012] 204 Taxman 321 Karnataka and (ii) CIT v Gem plus Jewellery [2011] 330 ITR 175 B, telecommunication charges and circuit charges of Rs.20,18,437/- should be excluded from both the export turnover and the total turnover.
15. In the result, the appeal of the assessee is partly allowed.
