ITAT held that on account of extra ordinary events viz. acquisition of IQ group of companies and amalgamation of Accentia Infoserve Pvt. Ltd with Accentia Technologies Ltd, the said company cannot be considered as good comparable.
Full Text of the ITAT Order is as follows:-
The present cross appeals by the Revenue and the assessee are directed against the Assessment order dated 23-2-2015 passed under section 144C(13) read with section 143(3) of the Income Tax Act 1961 (hearing after referred to as the Act).
2. The brief facts of the case as emanating from records are: The assessee is engaged in the business of manufacture and sale of turbo chargers. The assessee is also engaged in the business of Information Technology enabled Services (ITeS). During the period relevant to assessment year under appeal, the assessee entered into various international transactions. The assessee selected Transactional Net Margin Method (TNMM) as the most appropriate method to bench mark its international transactions and adopted operating profit/operating cost as profit level indicator. The assessee selected comparables to bench mark its international transactions on the basis of FAR analysis. The average unadjusted margin of the comparables in the international transactions related to ITeS was determined by the assessee at 14.95 percent as against 11.64 percent of its own. The Transfer Pricing Officer (TPO) determined arms length margin of the comparable at 32.12 percent and made adjustment of Rs. 2,62,00,000 in respect of international transactions relating to ITeS. Aggrieved by the order of TPO dated 28-1-2014, the assessee filed objections before the Dispute Resolution Panel (DRP). The DRP vide directions dated 26-12-2014 partly accepted the objections raised by the assessee. On the basis of directions of the DRP, the assessing officer vide impugned order made upward adjustment of Rs. 2.41crores in the income returned by the assessee.
3. The assessee in appeal before the Tribunal as assailed the assessment order by raising following grounds :–
“1. Transfer Pricing Adjustment :–
1.1 The learned DCIT pursuant to the directions of learned DRP erred in law and on the facts and in circumstances of the case in making an adjustment amounting to Rs. 2,41,00,000 to the value of international transactions entered into by the Appellant with its associated enterprises in respect of provision of IT enabled and market support services.
2. Disregarding search methodology adopted by the Appellant without any cogent reasons
2.1 The learned DCIT pursuant to the directions of learned DRP erred in law and on the facts and in circumstances of the case in disregarding search methodology with respect to the provision of IT enabled and market support services adopted by Appellant without any cogent reasons.
3.Use of financial information of comparable companies only for assessment year 2010-11 and non-consideration of contemporaneous data
3.1 The learned DCIT pursuant to the directions of learned DRP erred in law and on the facts and in circumstances of the case in not considering the multiple year data and contemporaneous data i.e. data available at the time of undertaking the transfer pricing study for determining the arm’s length price of international transaction pertaining to IT enabled and market support services.
4. Rejection of a comparable company
4.1 The learned DCIT pursuant to the directions of learned DRP erred in law and on the facts and in circumstances of the case in rejecting functionally comparable company selected by the Appellant in its transfer pricing study report.
5. Inclusion of functionally non-comparable companies
5.1 The learned DCIT pursuant to the directions of learned DRP erred in law and on the facts and in circumstances of the case in selecting/including certain functionally non-comparable companies as comparable in the final set of comparable companies.
6. Erroneous consideration of operating margin of Fortune Infotech Ltd.
6.1 The learned DCIT pursuant to the direction of learned DRP erred on the facts and in circumstances of the case in considering incorrect percentage of Profit Level Indicator of Fortune Infotech Ltd.
7. Non-granting of risk adjustment
7.1 The learned DCIT pursuant to the directions of learned DRP erred in law and on the facts and in circumstances of the case in not granting and rejecting the market risk adjustment submitted by the Appellant by comparing full-fledged risk bearing entities with the Appellant’s captive operations.
8. Benefit of the variation/reduction of 5 percent from the arithmetic mean
8.1 The learned DCIT pursuant to the directions of learned DRP has erred in law and on the facts and in circumstances of the case in not granting the benefit of + 5 percent as per proviso to section 92C (2) of the Act.
9. Non-applicability of transfer pricing provisions to the Appellant enjoying tax holiday regime under section 10A of the Act
9.1 The learned DCIT pursuant to the directions of learned DRP has erred in law and on the facts and in circumstances of the case in applying the transfer pricing provisions to the Appellant even though the Appellant is enjoying the tax holiday regime under section 10A of the Act.
10. Initiation of Penalty Proceedings
10.1 The learned DCIT erred on the facts and in law in initiating penalty proceedings under section 271(1) (c) of the Act.
11. Each one of the above grounds of appeal is without prejudice to the other.
12. The Appellant reserves the right to amend, alter or add to the grounds of appeal.”
The assessee has also filed additional grounds of appeal on 26-7-2016 which are as under :–
“1. The assessing officer/Dispute Resolution Panel/Transfer Pricing Officer has erred in incorrectly computing the Profit Level Indicator of one of the comparable companies viz. ‘Jeevan Scientific Technology Ltd.’ (Segmental) (earlier known as ‘Jeevan Softech Ltd.’) at 39.64 percent.
2. The assessing officer/Dispute Resolution Panel/Transfer Pricing Officer has erred in including ‘ICRA (Online) Ltd. (Segmental)’ as comparable company. “
3. The assessing officer/Transfer Pricing Officer has erred in considering ‘Eclerx Ltd.’ as comparable company and the Dispute Resolution Panel has erred in not excluding the said company on the ground of functional comparability.
4. The Appellant craves leave to add, alter, amend, substitute and/or modify in any manner whatsoever all or any of the foregoing grounds of appeal at or before the hearing of the appeal.”
4. The Revenue in appeal has impugned the findings of DRP by raising following grounds :–
“1. Whether DRP was right in law and on facts in excluding functionally comparable companies only on the basis of turnover, when the assessee himself had not applied any such criteria.
2. Did the DRP fall into error in not appreciating the terms of rule 10B(2) of the Income Tax Rules, 1962 regarding functional comparability. “
5. Shri Ketan Ved with Shri Amit Singhal appearing on behalf of the assessee submitted that if certain companies viz. Genesys International Ltd., Accentia Technologies Ltd. & ICRA Online Ltd., are excluded from the list of comparables, operating margin of Fortune Infotech Ltd. is rectified and necessary corrections are made in computation of profit level indicator of Jeevan Scientific Technology Ltd. then the average margin of the comparables would fall within the range of profit margin of assessee.
5.1 The learned AR submitted that the co-ordinate Bench of the tribunal in assessee’s own case in Cummins Turbo Technologies Ltd. v. Dy. DIT, IT Appeal Nos. 161 & 269 (PN.) of 2013, dt. 29-9-2014, has excluded Genesys International Corporation Ltd. (hereinafter referred to as ‘GENESYS’) from the final set of comparables on account of abnormal high profits. Similar view was taken by the Tribunal in assessee’s appeal in Cummins Turbo Technologies Ltd. v. Dy. DIT (IT) (2016) 68 taxmann.com 273 (Pune-Trib.). The unadjusted operating margin of GENESYS in the financial year 2009-10 that is relevant to the assessment year 2010-11 is 112.31 percent. Thus, GENESYS has super normal profits in the corresponding assessment period. In order to further buttress his submissions the learned AR placed reliance on the decision of Hyderabad Bench of the Tribunal in the case of HSBC Electronic Data Processing India (P.) Ltd. v. Dy. CIT (2015) 56 taxmann.com 78 (Hyd.-Trib.) In the said case, GENESYS was rejected as comparable due to functional disparity. GENESYS is providing geospatial services to its customers. This is highly specialized service with respect to relative position of things on the earth surface. These basically include 3D mapping, navigation maps, image processing, cadastral mapping etc. The services provided by GENESYS are quite different from the services rendered by the assessee and there cannot be any comparison between the two.
5.2 In respect of Accentia Technologies Ltd. (hereinafter referred to as ‘ACCENTIA’) the learned AR submitted that certain extraordinary events have taken place during the year under consideration in case of ACCENTIA. These extraordinary events refer to:–
(i) Acquisition if IQ Group of companies in U.K; and
(ii) Amalgamation of Accentia Infoserve (P.) Ltd. with the assessee company.
The learned AR submitted that the co-ordinate Bench of the tribunal in the case of Aptara Technologies (P.) Ltd. v. Asstt. CIT, IT Appeal Nos. 247 & 295 (Hyd.) of 2014, dt. 18-2-2015 has held that due to extraordinary events during the year ACCENTIA is not a good comparable to entities engaged in ITeS.
5.3 The learned AR in respect of Fortune Infotech Ltd. (hereinafter referred to as ‘FORTUNE’) submitted that the company was initially rejected by the assessee as sufficient data was not available in respect of the said company in public domain. Subsequently, when the relevant information was available in public domain the assessee prayed for including the company in the list of comparables. The DRP directed the assessing officer (assessing officer) to include Fortune Infotech Ltd. in the list of comparables provided it fulfills all the filters used by the TPO in his order. The DRP categorically mentioned that the unadjusted operating margin of FORTUNE is 19.62 percent and working capital adjusted margin of the said company is 13.30 percent. However, the assessing officer while passing the order under section 143(3) read with section 144C(3) of the Act has taken the margin of FORTUNE as 21.80 percent, without assigning any reason. The assessee has filed rectification petition under section 154 of Act and the same is still pending for final disposal. The learned AR prayed for directions to assessing officer to consider the correct margin of Fortune Infotech Ltd. in accordance with the directions of DRP.
5.4 The learned AR submitted that the authorities below have earned in including Jeevan Scientific Technology Ltd. in the final list of comparables. The company does not satisfy the filter of minimum 75 percent export revenue to total revenue. The said company is having substantial revenue from BPO operations. The TPO has not considered ERP segment revenue which has been classified in the audited financial results of the company. The learned AR further submitted that in the case of Aptara Technologies (P.) Ltd. (supra), the Tribunal has held that Jeevan Scientific Technology Ltd. formerly known as Jeevan Softech Ltd. has two segments i.e. BPO operations and ERP. The Tribunal remitted the matter back to assessing officer to work out the correct margins of the said company and thereafter, determine the average margins of comparables. The learned AR prayed for similar directions to TPO for computing correct margins of ITES segment of Jeevan Scientific Technology Ltd.
5.5 In respect of inclusion of ICRA Online Ltd. (segmental), in the list of comparables, the learned AR submitted that the company is functionally different and is a super profit making company. In the year under consideration the export turnover of the company is Rs. 1,114.09 lakhs as against the total turnover of Rs.1835.9 lakhs which is less than 75 percent of the total turnover. Therefore, the company fails to qualify export turnover filter of 75 percent. The DRP in assessment year 2009-10 had excluded the company from list of comparables on export turnover filter. The learned AR prayed for maintaining consistency and remove ICRA Online Ltd. (segmental) from the final set of comparables.
5.6 The learned AR submitted that if the companies mentioned above are exclude from the final set of comparables, the other grounds raised in the appeal will become academic and he would not be pressing the remaining grounds.
6. On the other hand, Shri T.Vijaya Bhaskar Reddy representing the department vehemently supported the findings of DRP and assessing officer for including above said companies in the final list of comparables. The learned DR submitted that the department in its appeal has assailed the findings of DRP in excluding functionally comparable companies only on the basis of turnover. The learned DR referred to exclusion of Eclerx Services Ltd. from the list of comparables on the ground of turnover filter without any detailed discussion. The learned DR prayed for including the company in final list of comparables.
7. The learned AR controverting the submissions made by the learned DR submitted that a perusal of order by TPO would show that one of the contentions of the assessee in respect of Eclerx Services Ltd., was that the company fails to satisfy turnover filter. In the objections before DRP, the assessee argued for excluding Eclerx Services Ltd. from the list of comparable companies inter-alia on the ground that the total turnover of the assessee during the year under consideration was Rs. 14.33 crores as compared to the turnover of Eclerx Services Ltd., which is Rs.257.02 crores. The learned AR submitted that the co-ordinate Bench of the Tribunal in assessee’s own case for assessment year 2009-10 has excluded Eclerx Services Ltd., on account of functional differences. The assessee in additional ground of appeal No. 3 has assailed the directions of DRP in excluding Eclerx Services Ltd. only on the basis of turnover. The company is liable to be rejected on ground of functional differences, as well.
8. We have heard the submissions made by the representatives of rival sides and have perused the orders of the authorities below. The main grievance of the assessee in appeal is against inclusion of some companies in the final list of comparables. The final list of comparables and their PLI after working capital adjustment is as under :–
