Income Tax Appellate Tribunal - Pune
Hov Services Ltd.,, Pune vs Assessee on 31 August, 2016
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IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "B", PUNE
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BEFORE SHRI R.K. PANDA, AM
AND SHRI VIKAS AWASTHY, JM
आयकर अपील सं. / ITA No.1896/PN/2013
#नधा&रण वष& / Assessment Year : 2009-10
HOV Services Ltd., .......... अपीलाथ / Appellant
3rd Floor, Sharda Arcade,
Satara Road, Pune - 411037
PAN :AAACC8675N
बनाम v/s
JCIT (OSD), Circle-1(2), Pune .......... यथ /Respondent
आयकर अपील सं. / ITA No.1969/PN/2013
#नधा&रण वष& / Assessment Year : 2009-10
DCIT, Circle-1(2), Pune .......... अपीलाथ /Appellant
बनाम v/s
HOV Services Ltd.,
3rd Floor, Sharda Arcade,
Satara Road, Pune - 411037 .......... यथ /Respondent
PAN :AAACC8675N
Assessee by: Shri Nikhil Pathak
Revenue by : Shri Hitendra Ninawe
सन
ु वाई क तार ख / घोषणा क तार ख /
Date of Hearing :04.08.2016 Date of Pronouncement: 31.08.2016
आदे श / ORDER
PER R.K.PANDA, AM :
These are cross appeals. The first one is filed by the Assessee and the second one by the Revenue and are directed against the order dated 13-08-2013 of the CIT(A)-IT/TP, Pune relating to Assessment Year 2009-10. For the sake of convenience these were heard together and are being disposed of by this common order. 2
ITA No.1896 & 1969/PN/2013
2. Facts of the case, in brief, are that the assessee is a Listed Public Limited company and is engaged in providing IT Enabled Services. It filed its return of income on 09-10-2009 declaring loss of Rs.2,68,14,081/-. During the course of assessment proceedings the AO observed that the assessee company provides various BPO/ITES services to its AEs. From the Transfer Pricing (TP Documents furnished) for the impugned assessment year, he observed that the assessee company has entered into the following international transactions with its AE :
Sr.No. Nature of Transaction Amount (Rs.) Method used 1 Provision of BPO Services 3,88,38,097 TNMM
3. From the TP study report submitted by the assessee and details/explanation submitted during the course of assessment proceedings, the AO noted that certain facts relating to the international transactions undertaken by the assessee and their benchmarking done does not comply to the Transfer Pricing Regulations of India. He, therefore, issued a show cause notice to the assessee asking him to justify the TP study. From the details furnished by the assessee, he observed that the assessee has selected the following 8 companies as comparable on the basis of the search conducted in the public database, i.e. Prowess and Capitaline. The PLI (operating profit to operating cost ratio) of the comparables considering data for A.Y. 2008-09 are as under :
Sr.No. Company Name OP/OC(%)
1 Capricorn Systems Global Solutions Ltd. 1.83
2 Cat Technologies Ltd. 34.87
3 Infinite Data Systems Pvt. Ltd. 29.51
4 Net4Nuts Ltd. 8.60
5 Persistent Ebusiness Solutions Ltd. 3.55
6 Saven Technologies Ltd. 2.52
7 Sheorey Digital Systems Ltd. 28.77
3
ITA No.1896 & 1969/PN/2013
8 Spry Resources India P. Ltd. 16.71
Mean 15.79
4. He observed that the search criteria and the acceptance rejection matrix applied by the assessee for arriving at final comparable set are as under :
"a. Companies with income from ITES/BPO > 75% of the revenue or segmental revenue - accepted by TPO b. Companies with less than 75% earnings from exports - rejected by TPO.
c. Companies with less than 25% related party transactions - accepted by TPO d. Companies with Peculiar Circumstances are rejected."
5. According to the AO companies with income of more than 75% from ITES/BPO and companies with less than 25% RPT may be selected. He therefore applied these additional/modified filters or criteria for selecting appropriate comparables functionally similar to that of the assessee. In view of the above, the TPO was of the opinion that only one company, i.e. Infinite Data Systems Pvt. Ltd. is comparable and the rest of the companies selected by the assessee are not at all comparable. The reasons given by the TPO for such rejection are as under :
Sr. Name of the comparable Remarks
No.
1 Capricorn Systems Global It fails 25% RPT filter applied by the AO, thus it
Solutions Ltd. is not considered as a comparable
2 Cat Technologies It is engaged in software development and
consultancy services, hence functionally
different, thus the company is not considered as a comparable 3 Infinite Data Systems Pvt. Comparable Ltd.
4 Net4Nuts Ltd. The company fails export earnings filter, thus the company is not considered as a comparable 4 ITA No.1896 & 1969/PN/2013 5 Persistent Ebusiness The company fails export earnings filter, thus Solutions Ltd. the company is not considered as a comparable 6 Saven Technologies Ltd. The company fails export earnings filter, thus the company is not considered as a comparable 7 Sheorey Digital Systems The company fails export earnings filter, thus Ltd. the company is not considered as a comparable 8 Spry Resources India P. The company fails export earnings filter, thus Ltd. the company is not considered as a comparable
6. The TPO further noted that the following pertinent defects have been found in the TP analysis carried on by the assessee which are as under :
"1. Some of the assessee's comparables do not stand scrutiny of FAR analysis.
2. Some companies though qualify all the filters applied by the tax payer based on the data pertaining to the F.Y. 2007-08, they have not been selected.
3. The assessee selected companies having predominant domestic operations though the assessee is mainly an export oriented IT enabled service provider."
In view of the above, he held that the ALP determined by the assessee is not reliable and correct. He, therefore, invoked the provisions of section 92C(3)(c).
7. From the various details furnished by the assessee, the AO noted that the operating revenue, operating expenses and operating profit of the assessee can be computed as under :
Amount (Rs.) Sales 43773517 Forex gain 2696077 Operating income 46469594 Total cost 58964581 Less : Interest 135821 Operating Cost(OC) 58828760 Operating Profit (OP) -12359166 OP/OC (%) -21.01 5 ITA No.1896 & 1969/PN/2013
8. He further observed that the assessee had also adjusted its PLI on account of expenses in relation to the raising of finance and buy back on the ground that these are extraordinary or non operating expenses. Since the assessee did not produce any documentary evidence to substantiate the claim and since there was no such comment in the tax audit report and the assessee has not disallowed such expenses in the computation of income, if it were related to raising of capital as claimed by the assessee, the AO rejected the claim of the same as extraordinary or non operating expenses.
9. So far as the adjustment of tax refund claim treating the same as prior period expenses, the AO also rejected the same on the ground that assessee has not produced any documentary evidence to substantiate the claim and there was no such comment in the tax audit report and the assessee has not disallowed the said expenses in the computation of income. As regards the treatment of salary expenses of accounting and MIS process as extraordinary expenses, the TPO held that these are not extraordinary expenses and are routine expenses. So far as the treatment of salary expenses of software team which is not capitalized on account of software not succeeded and considered by the assessee as extraordinary expenses is concerned, the TPO observed that assessee did not produce any documentary evidence to substantiate the claim nor any such comment in the tax audit report and the assessee has not disallowed such expenses in the computation of income. In view of the above, the TPO held that the above-mentioned expenses are neither extraordinary nor non operating expenses. Therefore, he considered these expenses as operating and booked as operating 6 ITA No.1896 & 1969/PN/2013 cost. The AO, thereafter selected 3 new companies as comparables and determined the operating profit margin at 33.07% which is as under :
Sr.No. Name of the comparable OP/OC (%)
1 Infinite Data Systems Pvt. Ltd. 30.87
2 Coral Hubs Ltd. (Formerly Vishal 38.69
Information Technologies Ltd.)
3 Crossdomain Solutions Ltd. 29.40
4 e4e Healthcare Solutions Ltd. (earlier known 33.31
as Nittany Outsourcing Services Pvt. Ltd.
Arithmetic Mean 33.07
10. The assessee agitated the matter before the CIT(A). It was submitted that the TP adjustment has arisen primarily because of the denial of adjustment by the TPO to its operating profit and also because of rejection of certain loss making companies as comparables. It was argued that if the contention of the assessee on these 2 issues are accepted, then the various other grounds raised by the assessee before the CIT(A) may not be necessary because the assessee will be falling within the safe harbour range of +/-5%. It was submitted that it had incorrectly applied the filter of loss making companies resulting in exclusion of companies with losses as comparable. The TPO also accepted this filter as applied by the assessee and excluded loss making companies from the list of the comparable companies. However, it realized later that filter of loss making companies is not appropriate in the facts of its case. It was submitted that the assessee has incurred significant loss due to certain unprecedented and extraordinary events like ESOP issue, buyback of shares and fall in GDR issue. It was submitted that above extraordinary cost, if ignored, then the company would make significant operating profit. It was accordingly argued that it would not be appropriate to reject the companies with operating loss. 7
ITA No.1896 & 1969/PN/2013 Therefore, the filter applied by the assessee as well as the TPO to exclude the companies with negative PBIT will not be justified in this case. Further, incurring of profit or loss is part of the normal business cycle. Therefore, if viewed from this perspective, loss making companies should be excluded as comparables.
11. Based on the arguments advanced by the assessee the CIT(A) held that the assessee has not proved the correctness of the acceptance before the AO and no documentary evidence were also submitted before him to substantiate the same. Therefore, when the expenditure itself is not proved the discussion on this extraordinary nature is irrelevant. Thus, the CIT(A) confirmed the action of the AO in holding that these expenses are neither extraordinary nor non- operating and therefore has to be included while computing the operating margin of the assessee company.
12. So far as the various comparables selected by the AO is concerned, he accepted the contention of the assessee and held that there is no reason to exclude loss making companies in the final list of comparables. He accordingly directed the AO to include the loss making companies in the list of comparables. The findings given by the CIT(A) on both the issues at Para 2.1.4 to 2.1.8 read as under :
"Findings :
2.1.4 I have considered the arguments of the Appellant. I find that the Appellant's argument is that it had incorrectly applied the filter of loss making companies in the transfer pricing assessment proceedings.
Therefore, it should be permitted to correct its error in the appellate proceedings. In this connection, it may be necessary to discuss as to whether the Appellant can change stand taken by it during the transfer pricing assessment proceedings at the later stage. In my view, both the sides; be it assessee or the AO; are permitted to correct their admitted position provided such change is bonafide, does not cause prejudice to the vested rights of others and when such change is not expressly 8 ITA No.1896 & 1969/PN/2013 prohibited by law. There are several Tribunal judgments holding that the assessee is not bound by its Transfer Pricing study report. 2.1.5 In this case, the Appellant is a loss making company. It has contended that it will turn in to profit making company, if self- adjustment sought on account of extra-ordinary expenditure is permitted. The Appellant has sought self-adjustment on account of incurring of certain expenditure, which in its opinion are extra-ordinary items. I find that the Appellant has not proved correctness of the expenditure before the learned TPO. The learned TPO in para 6.4 of his order has recorded his finding that the Appellant has neither produced any documentary evidence to substantiate claim nor has made any such comment in the tax audit report in Form 3CD. The Appellant has not challenged this finding in any of the Grounds of Appeal filed before me nor has it filed additional evidence in support of expenditure in the appellate proceedings. When expenditure itself is not proved on facts, discussion on its extra-ordinary nature is Irrelevant. When the fact of expenditure is not established, it cannot be presumed to have been expended for the purpose of business or for that matter, as an operating expenditure. In these circumstances, I confirm the decision of the learned TPO to deny self-adjustment on account of extra-ordinary expenses. With the result, the Appellant will be a loss making company. 2.1.6 As far as comparability of loss making company is concerned, according to. me, it would be inappropriate to compare the same with profit making companies. It is fundamental that oranges cannot be compared with apples. Therefore, in my view filter of loss making company cannot be used to exclude such companies. The Appellant has also submitted that according to its business model, it has not provided services by following 'cost plus' business model. It has charged its AE on the hourly basis. It has furnished copies of the invoices to substantiate its claim in support of the same.
2.1.7 I am of the considered view that the Appellant's case itself being a loss making, it would be unfair and against the principles of transfer pricing compare only with profit making companies. Accordingly, I direct the learned AO to include loss making companies also in the list of the comparable companies.
2.1.8 The Appellant has submitted that once loss making companies are included In the list of the comparable companies then' the average net margin of the comparable companies would fall within the +/- 5% safe harbour range u/s 92C(2). Since, this Ground of Appeal decided in favour of the Appellant, it would result Into deletion of the transfer pricing adjustment. Therefore, It is not necessary to adjudicate other Grounds of Appeal. Accordingly, I do not discuss and give my findings on the other Grounds of Appeal."
13. The CIT(A) further held that once loss making companies are included in the list of comparables, then the average net margin of the comparable companies would fall within +/-5% of safe harbour 9 ITA No.1896 & 1969/PN/2013 range u/s.92C(2) and therefore the addition made on account of TP adjustment will be deleted.
14. Aggrieved with such order of the CIT(A) the assessee as well as the revenue are in appeal before us with the following grounds :
Grounds by the Assessee :
"The following grounds are taken without prejudice to each other- On facts and in law, 1] The assessee submits that 3 companies namely Coral Hubs ltd. (Formerly Vishal Information Technologies Ltd.), Crossdomain Solutions Ltd. and e4e Healthcare Solutions Ltd. (Formerly as Nittany outsourcing Services Pvt. Ltd.) as selected by the Transfer Pricing Officer (TPO) are not comparable with the assessee company and these companies should be rejected as comparables while determining the Arm's Length Price (ALP).
2] The Ld. CIT(A) erred in confirming the Operating Profit Margin computed by the Ld. TPO at (-) 21.01% as against the Operating Profit margin of (+) 22.05% computed by the appellant in its Transfer Pricing Study Report after making certain adjustments.
2.1] The Ld. CIT(A) erred in rejecting all the adjustments made by the appellant while computing the operating cost as well as operating profit without giving any concrete or rational justification for rejecting the same.
2.2] The Ld. CIT(A) failed to appreciate that the finance raising cost, prior period items written off and extra ordinary items were to be excluded while determining the operating profit and operating cost while determining the ALP of the international transactions entered into by the appellant company.
3] The CIT(A) has failed to grant the working capital adjustment in respect of comparable companies selected by the Ld. TPO.
4] The assessee submits that it shall be allowed the credit for all the lawful prepaid taxes like advances tax and Tax Deducted at Source, which the appellant was eligible to claim.
5] The assessee submits that no interest is leviable u/s. 234A of the Act, as return of income was furnished within the time limit prescribed u/s. 139(1) of the act and that no interest may be levied u/s. 234B of the Act in respect of unanticipated additions made on account of transfer pricing adjustment.
6] The appellant reserves its right to add, alter, amend or withdraw any ground of appeal either before or at the time of hearing of this appeal."10
ITA No.1896 & 1969/PN/2013 Grounds by the Revenue :
"1. The order of the learned Commissioner of Income-tax (Appeals) is contrary to law and to the facts and circumstances of the case.
2. The learned Commissioner of Income-tax (Appeals) grossly erred in accepting the assessee's claim that it had incorrectly applied the filter of loss making companies in the transfer pricing assessment proceedings and, therefore, it should be permitted to correct its error in the appellate proceedings.
3. The learned Commissioner of Income-tax (Appeals) grossly erred in holding that the assessee can change the stand taken during the transfer pricing assessment proceedings at a later stage.
4. The learned Commissioner of Income-tax (Appeals) grossly erred in directing the Assessing Officer to include loss-making companies as a comparable when the Transfer Pricing Officer / Assessing Officer had excluded loss-making companies by accepting the filter as applied by the assessee itself and also when the assessee had not submitted the list of loss-making comparable companies either before the Assessing Officer or before the Ld. Commissioner of Income- tax(Appeals).
5. The learned Commissioner of Income-tax (Appeals) grossly erred in concluding that once loss making companies are included in the list of the comparable companies then the average net margin of the comparable companies would fall within the + / -5% safe harbour range u/s. 92C(2) and hence the addition made on account of transfer pricing adjustment will be deleted.
6. For these and such other grounds as may be urged at the time of the hearing, the order of the learned Commissioner of Income-tax (Appeals) may be vacated and that of the Assessing officer be restored.
7. The appellant craves leave to add, amend, alter or delete any of the above grounds of appeal during the course of the appellate proceedings before the Hon'ble Tribunal."
15. So far as ground of appeal No.1 is concerned, the Ld. Counsel for the assessee submitted that the AO has selected 4 companies as comparables out of which 3 companies are not at all comparable with the assessee company. So far as Coral Hubs Ltd. is concerned, he submitted that the employee cost is the main item of expenditure in the line of business carried out by the assessee company. However, in the case of Coral Hubs Ltd. the employee cost is hardly 3% which is evident from page 206 of the paper book. He submitted 11 ITA No.1896 & 1969/PN/2013 that the turnover of Coral Hubs Ltd. has increased from Rs.38.07 crores to Rs.61.73 crores while its employee cost has increased marginally from Rs.1.11 crores to Rs.1.22 crores in the financial year ending 31-03-2008 and 31-03-2009 respectively. Further, the related party transactions in this company is more than 25%. Referring to the decision of the Pune Bench of the Tribunal in the case of BNY Mellon International Operations (India) Pvt. Ltd., Vs. DCIT reported in (2015) 55 taxmann.com 386 he submitted that the Tribunal in the said decision, after considering the nature of business carried out has held that Coral Hubs Ltd. is to be rejected as a comparable.
16. So far as selection of Cross Domain Solutions Ltd. as a comparable is concerned, he submitted that this company is engaged in high skilled IT services which cannot be compared with the services rendered by the assessee company. Referring to the decision of the Pune Bench of the Tribunal in the case of BNY Mellon International Operations (India) Pvt. Ltd. (Supra) he submitted that Cross Domain Solutions Ltd. has been rejected as comparable on the above ground.
17. So far as e4e Healthcare Solutions Ltd. is concerned, he submitted that the above company is engaged in different business, i.e. business of providing healthcare outsourcing services for the healthcare industry in the US which is evident from the copy of the annual report, copy of which is placed at page 243 of the paper book at Para 1.1. Therefore, this company should be excluded as a comparable.
12
ITA No.1896 & 1969/PN/2013
18. The Ld. Departmental Representative on the other hand heavily relied on the orders of the AO and the CIT(A) on this issue.
19. We have considered the rival arguments made by both the sides, perused the orders of the AO and CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the assessee in its TP study report has considered 8 companies as comparable. However, the AO considered only Infinite Data Systems Pvt. Ltd. as comparable and rejected the 7 other companies selected by the assessee as not comparable. The AO in the fresh T.P. study considered 3 new companies as comparable, the details of which has already given at Para 9 of this order. It is the submission of the Ld. Counsel for the assessee that the 3 new companies selected by the TPO as comparable which has been upheld by the CIT(A) are not comparable. So far as the Coral Hubs Ltd. is concerned, we find the employee cost of the said company is hardly 3% of the revenue which is evident from the profit and loss account, copy of which is placed at page 206 of the paper book. A perusal of the profit and loss account show that the personnel cost has been shown at Rs.1,22,28,432/- as against the turnover of Rs.61,08,57,165/-. Further, the turnover has gone up from Rs.38.08 crores in F.Y. 2007-08 to Rs.61.09 crores in financial year ending 31-03-2009. However, the employee cost has gone up from Rs.1.11 crores to only Rs.1.22 crores. The submission of the Ld. Counsel for the assessee that the related party transactions of the above company is more than 25% could not be controverted by the Ld. Departmental Representative. Further, the notes forming part of accounts for the year ended 31-03-2009, copy of which is placed at pages 213 and 13 ITA No.1896 & 1969/PN/2013 214 of the paper book (page 75 and 76 of the annual audited accounts) show that the related party transactions are more than 25%, the details of which are given as under :
9. Related party Transactions Name of the Party Country As at As at holding 31-03-2009 31-03-2008 Basiz Fund Service Pvt. Ltd. India 86.84% 86.92% Tutis Digital Publishing Pvt. Ltd. India 79.37% -
Digital Content Solutions Ltd. UK 100% -
We therefore find merit in the submission of the Ld. Counsel for the assessee that in view of the low employee cost and high related party transactions Coral Hubs Ltd. should be excluded from the comparables.
20. We find the Pune Bench of the Tribunal in the case of BNY Mellon International Operations (India) Pvt. Ltd. (Supra) has held that Coral Hubs Ltd. (Formerly known as Vishal Information Technology Ltd.) cannot be included as comparable. The relevant observation of the Tribunal at Para 24 to 26 read as under :
"24. The next objection of the assessee is with regard to the inclusion of Coral Hubs Ltd. (Formerly known as Vishal Informational Technologies Ltd.) in the final set of comparables. The plea of the assessee in this regard has been noted by the TPO in para 29 of his order. It was canvassed by the assessee that the said concern was functionally dissimilar to the activities undertaken by the assessee. It was pointed out that the said concern was involved in digitization activity and was also in e-publishing arena. It was also pointed out that it had entered into a new business of Digital Library & Print on Demand (POD) activities, which are quite different from the activities of BPO undertaken by the assessee. By analyzing the employee cost ratio to sales of the said concern, assessee also pointed out before the TPO that the said concern was operating with a different business model. In the case of Coral Hubs Ltd., the employee cost as a percentage of sales stood at 1.22% for the financial year under consideration whereas the employee cost as a percentage of sales stood at 54.22% in the case of the assessee. It was also pointed out that, M/s Coral Hubs Ltd. was having major vendor payments which showed that it was outsourcing its activities to third parties on a substantial level, whereas assessee was operating through its employees. All the aforesaid pleas of the assessee have been summarily rejected by the TPO.14
ITA No.1896 & 1969/PN/2013
25. Before us, the Ld. Representative for the assessee has reiterated the submissions put-forth before the TPO and has also pointed out that in a similar situation, the Pune Bench of the Tribunal in the case of PTC Software (India) Private Limited (supra) has found the said concern to be functionally dissimilar to a concern engaged in rendering of BPO services (ITES). The following discussion in the order of the Tribunal in the case of PTC Software (India) Private Limited (supra) has been rendered to :-
"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 was that 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 that reason, the said concern has been included as a comparable for the purposes of comparability analysis. In this connection, the plea set up by the assessee is that the said concern is engaged in not only IT-Enabled services, but also in providing quality products and in the creation of animated films and books. It has also been ascertained by referring to the Annual Report of the said concern that it is engaged in providing agency services by way of outsourcing the services to third party vendors and acting as an intermediary between the final customer and the vendor. The assessee furnished detailed submissions in this regard before the lower authorities, copies of which have been placed in the Paper Book at pages 420.8 to 420.31. By referring to the written submissions, it is also sought to be pointed out that the intermediary functions performed by the said concern can be compared to that of a distributor which takes title to service/product for resale to the customers. The aforesaid assertion is sought to be substantiated by the details of payments made by the said concern for data entry and vendor payments, personnel 15 ITA No.1896 & 1969/PN/2013 costs and sales. It is, therefore, contended that the 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 concern 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."
26. In the context of the aforesaid precedent, no cogent reasoning has been advanced by the Ld. Departmental Representative and therefore, we uphold assessee's plea for exclusion of Coral Hubs Ltd. (formerly known as Vishal Informational Technologies Ltd.) from the final set of comparables."
21. In view of the above discussion, we accept the plea of the Ld. Counsel for the assessee that Coral Hubs Ltd. has to be rejected as comparable.
22. So far as Cross Domain Solutions Ltd. is concerned, we find the Tribunal in the case of BNY Mellon International Operations (India) Pvt. Ltd. (Supra) has excluded the above company as not 16 ITA No.1896 & 1969/PN/2013 comparable. The relevant observation of the Tribunal from para 12 to 15 of the year read as under :
"12. Another plea raised by the assessee is for exclusion of Crossdomain Solutions Ltd. from the final set of comparables. In this regard, assessee canvassed before the TPO that the said concern was functionally not comparable to the activity of IT enabled services being carried out by the assessee. It was pointed out by the assessee before the TPO that the said concern was involved in various activities which involved outsourcing, human resources, insurance, healthcare/accounting and consulting, business excellence, market research/analysis and IT services. It was pointed out that the above functions being performed by the said concern were not comparable to the activity of an IT enabled service provider undertaken by the assessee. It was also canvassed that there was no segmental profitability available from the Annual financial statement of the assessee and the said concern was not a comparable concern on the entity level. The TPO has rejected the plea of the assessee on similar grounds as taken by him for rejecting the assessee's plea for exclusion of Accentia Technologies Ltd.
13. Before us, the Ld. Representative has relied upon the decision of the Mumbai Bench of the Tribunal in the case of DCIT vs. M/s Willis Processing Services (India) Pvt. Ltd. vide ITA No.2152/Mum/2014 dated 10.10.2014 in order to justify the exclusion of Crossdomain Solutions Ltd..
14. We find that M/s Wills Processing Services (India) Pvt. Ltd. (supra) was a concern where the tested party was providing IT enabled services to its various group concerns and activities were quite similar to the activity of IT enabled services rendered by assessee to its affiliates. In this context, the concern, M/s Crossdomain Solutions Ltd.
was found to be functionally not comparable by the DRP and such decision was affirmed by the Tribunal by making the following discussion :-
"3. M/s Crossdomain Solutions Ltd.
This company has been rejected by the DRP on the ground that it is indulged in high skill IT services which are not comparable to the routine I.T. Enabled services. The Tribunal Hyderabad Bench in the case of M/s Market Tools Research Pvt. Ltd. in ITA No.1811/Hyd/2012 has held that this company is providing services which are in the nature of KPO. Further, the company is engaged in providing Niche services as well as developed its own brand 'Exdion' to target the insurance industry in US. The Tribunal followed the findings of the Bangalore Bench in the case of M/s Symphony Marketing Solutions India Pvt. Ltd. in ITA No.1316/Bang/2012 while rejecting the issue of this company in the final set of comparables. Respectfully following the findings of the co-ordinate bench, we uphold the directions of the DRP for the rejection of this company from the final list of comparable."17
ITA No.1896 & 1969/PN/2013
15. Following the aforesaid precedent, which has been rendered in the context of the same assessment year, we uphold assessee's plea for exclusion of Crossdomain Solutions Ltd. from the final set of comparables. We hold so."
23. Following the decision of the Coordinate Bench of the Tribunal in the case of BNY Mellon International Operations (India) Pvt. Ltd. (Supra) and considering the fact that Cross Domain Solutions Ltd. is engaged in high skilled IT services which cannot be compared with the services rendered by the assessee, we direct the TPO to exclude the said company from the list of comparables.
24. So far as exclusion of e4e Health care Solutions is concerned, we find from page 243 of the paper book about the background of the company as given at para 1.1 and which reads as under :
"1.1 Background :
e4e healthcare Business Services Private Limited (formerly Nittany Outsourcing Services Private Limited) ['e4e Healthcare' or 'the Company'] is a Private Limited Company incorporated under the provisions of the Companies Act, 1956 ('the Act') on 26 February 2003. The registered office of the Company is located in Bangalore and its operations are located in Chennai.
The Company is primary engaged in the business of providing healthcare outsourcing services for the healthcare Industry in United States of America. The Company is a subsidiary of e4e Holdings Limited, Mauritious ('the holding company'). Effective June, 2009, the name of the Company has been changed to 'e4e Healthcare Business Services Private Limited' from 'Nittany Outsourcing Services Private Limited'
25. Since the above company is engaged in business of providing healthcare outsourcing services for the healthcare industries, the same in our opinion cannot be compared with the assessee which is engaged in providing ITES enabled services. Therefore, we find merit in the submission of the Ld. Counsel for the assessee that the above company should be excluded from the list of comparables. Ground of appeal No. 1 raised by the assessee is accordingly allowed. 18
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26. The Ld. Counsel for the assessee while arguing ground of appeal No.2 submitted that the main dispute raised by the assessee is with regard to the denial of adjustment in respect of extraordinary/non-operating expenses. He submitted that the lower authorities have erred in not allowing the adjustment on account of various expenses on the ground that these are not extraordinary/non operating expenses. So far as the expenses in relation to raising of finance and buyback is concerned, he submitted that the assessee has incurred these expenses on account of GDR issue, buyback of shares, restructuring options like ESOP etc. The total expenses on these items which were claimed as non- operating is Rs.1,02,17,339/-.
27. Referring to page 138 of the paper book the Ld. Counsel for the assessee drew the attention of the Bench to Annexure-1 containing such expenses which total to Rs.1,02,17,339/-. He submitted that the assessee had paid an amount of Rs.10,56,766/- to J.M. Financial Consultants Pvt. Ltd. for Consultancy of buyback issue. Referring to pages 141 to 145 of the paper book the Ld. Counsel for the assessee drew the attention of the Bench to the relevant agreement with JM Financials Consultants Pvt. Ltd. and the invoices raised by them. He submitted that an amount of Rs.45,00,300/- has been paid to Edelweiss Capital Ltd. for consultancy of GDR issue. Referring to pages 154 to 158 of the paper he drew the attention of the Bench to the letter received from the above company and the invoices raised by them. He submitted that the expenditure on GDR issue or buyback of shares is not relevant to providing of BPO services to these AEs. All these expenses have no connection to the providing of services to the AEs 19 ITA No.1896 & 1969/PN/2013 and therefore these expenses should be considered as non-operating expenses while determining the operating margin of the assessee.
28. As regards the observation of the CIT(A) that no details were submitted by the assessee he submitted that all those details in respect of the expenses incurred on raising of finance and buyback of shares were submitted to the AO and the CIT(A). Referring to pages 91 to 109 of the paper he drew the attention of the Bench to the letter addressed to the CIT(A) vide letter dated 21-12-2012 wherein the issue relating to the expenditure on raising of finance and buyback of shares is clarified. Referring to pages 180 to 197 of the paper book he drew the attention of the Bench to the letter addressed to the AO vide letter dated 26-12-2011 where all those details were submitted.
29. So far as rejected tax refund claim written off is concerned, he submitted that the assessee during this year has written off the service tax and VAT claimed as refundable from the Government since the refund claim was rejected. The total amount claimed is Rs.11,25,502/-. Referring to pages 138 and 159 to 162 and 187 to 189 of the paper book the Ld. Counsel for the assessee drew the attention of the Bench and submitted that all these details were filed before the AO and this expenditure was not related to the providing of services to the AEs. Referring to letter dated 21-12-2011 addressed to the CIT(A), copy of which is placed at pages 91 to 109 of the paper book, he submitted that this fact was also clarified before the CIT(A) at page 99 of the paper book. Therefore, the observation of the AO and the CIT(A) that no details were given is wrong.
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30. So far as the salary expenses of accounting and MIS process is concerned, he submitted that the assessee had submitted before the AO that F.Y. 2008-09 was year of recession and due to this the customers terminated accounting and MIS projects. The employees assigned on this project however continued with a hope to get some alternate project. Since no new projects were received, therefore, the assessee considered salary expenses of these employees amounting to Rs.19,35,527/- as extraordinary item. Referring to page 139 of the paper book he drew the attention of the Bench to the details of such salary expenses of employees of accounting and MIS Division. Referring to pages 187 to 189 of the paper book he drew the attention of the Bench to the reply given to the AO on this issue.
31. So far as salary expenses of software team is concerned he submitted that various employees were working on software projects. However, these projects were terminated and the cost incurred, which was capitalized in the books till earlier year, was debited to the profit and loss account. Referring to page 140 of the paper book he drew the attention of the Bench to the total expenditure at Rs.68,35,875/-. He submitted that till earlier year these expenses were treated as capital work in progress and the same is evident from the schedule of fixed assets given at page 11 of the paper book. He submitted that instead of capitalizing in the book the assessee in this year has debited the said expenditure to the profit and loss account since the project on which these employees are working did not materialise. Referring to page 100 of the paper book he submitted that relevant details were submitted to the CIT(A). Referring to pages 187 to 189 of the paper book he submitted that all these details were given to the AO. 21
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32. The Ld. Counsel for the assessee submitted that all the above 4 expenses are non operating expenditure and has no relation to providing of services to the AEs. Since these expenses are not operating in nature, therefore, these are to be excluded while determining the operating margin of the assessee company. For the above proposition, he relied on the following decisions :
1. Marubeni India Pvt. Ltd. Vs. DIT reported in 354 ITR 0638 (Delhi)
2. HCL Technologies BPO Services Ltd. -ITA Nos. 3547 & 5071/Del/2010 order dated 10-07-2015
3. Exxon Mobil Gas India Pvt. Ltd. - ITA No.417/Del/2011 order dated 13-11-2014.
4. Transwitch India Pvt. Ltd. reported in 151 TTJ 177
33. He submitted that in this year the assessee has incurred loss due to the above extraordinary expenses/non-operating items.
Referring to page 286 of the paper book he drew the attention of the Bench to the year-wise details of the operating revenue, expenditure and profit. He submitted that only in A.Y. 2009-10 the assessee has incurred loss while for other years the assessee has generated substantial profit. He submitted that the assessee is enjoying deduction u/s.10B and its entire income is exempt from tax. Referring to pages 282 to 285 of the paper book he submitted that in the year for A.Y. 2007-08 the Department has also passed an order where it has been held that the assessee has generated more than reasonable profit. He submitted that in the earlier years as well as in the later years the assessee has entered into transactions with its AEs and the assessee has shown substantial profit during those years. Only in A.Y. 2009-10 the assessee has incurred a loss 22 ITA No.1896 & 1969/PN/2013 because of incurring of these extraordinary expenses and due to recession in the industry for which the assessee did not get sufficient orders. He submitted that its expenses has increased, which is evident from the fact that the operating income in this year is Rs.4.64 crores as against Rs.6.22 crores in A.Y. 2008-09. The employee cost has increased from Rs.2.34 crores in A.Y. 2008-09 to Rs.3.72 crores in A.Y. 2009-10. Thus on one hand, the turnover of the assessee has reduced substantially in this year while on the other hand the employee cost and other expenses have increased. He accordingly submitted that the order of the CIT(A) on this issue be reversed and the operating profit of the assessee company be computed by excluding these extraordinary items.
34. The Ld. Departmental Representative on the other hand heavily relied on the order of the CIT(A).
35. We have considered the rival arguments made by both the sides, perused the orders of the AO and CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the assessee in the instant case is engaged in providing ITES enabled services and is a 100% EOU and is entitled for deduction u/s.10B in respect of its profits. The assessee filed its return of income declaring loss of Rs. 2,68,14,081/-. The assessee is into providing BPO services to its AEs to the tune of Rs.3,88,38,097/- and has adopted TNMM for determining the Arms Length Price. The assessee had considered its operating margin at 22.05% by adjusting the following expenses while computing the operating margin :
23
ITA No.1896 & 1969/PN/2013 Sr. Name of Expenditure Amount (Rs.) No. 1 Expenses in relation to raising of finance and 1,02,17,339/-
buyback 2 Rejected Service Tax refund claim expensed out 11,25,502/- 3 Salary expenses of accounting and MIS process 19,35,527/- 4 Salary expenses of Software Team 68,35,875/-
36. The AO in the assessment order held that the above adjustments made by the assessee as non operating expenditure is not justified since according to him these are neither extraordinary nor non-operating. Further, the AO held that the assessee has not given full details of such expenditure nor has made adjustment in the computation of income. We find the CIT(A) upheld the action of the AO on the ground that assessee has not proved the correctness of the expenses before the AO and further no documentary evidences were submitted to substantiate its claim. He further held that when the expenses itself is not proved the discussion on this extraordinary nature is irrelevant.
37. It is the submission of the Ld. Counsel for the assessee that full details were given justifying the exclusion of the above 4 items for computing the operating margin. However, the lower authorities have erroneously ignored such claim and held that assessee has not given full details.
38. We find merit in the above submission of the Ld. Counsel for the assessee. So far as the expenses in relation to raising of finance and buyback is concerned, we find the assessee vide letter dated 26-12-2011 addressed to the AO, copy of which is placed at pages 180 to 197 of the paper book, at page 187 had explained the 24 ITA No.1896 & 1969/PN/2013 reasons for exclusion of such expenditure. We find at para 2.4 in the same letter addressed to the AO the assessee has given its comments against the remarks of the AO. It has been categorically mentioned that the assessee has already submitted the documentary evidences of incurring of such expenditure along with reasons given for exclusion of such expenditure while computing the operating margin. So far as the rejected tax refund claim written off is concerned, we find the assessee in the said latter has also given its justification. Similarly, at page 99 of the paper book, the assessee had also clarified before the CIT(A) regarding the exclusion of such expenditure for computing the operating margin. Similar is the case with the salary expenses of accounting and MIS process and the salary expenses of software team.
39. We find merit in the submission of the Ld. Counsel for the assessee that the expenditure incurred on account of GDR issue, buyback of shares and restructuring options like ESOP etc. amounting to Rs.1,02,17,339/- should be considered as non- operating expenses while determining the operating margin of the assessee. Similar is the case with rejected tax refund claim written off since the said expenditure was not related to providing of services to its AEs. As regards the expenses of accounting and MIS process is concerned, we find because of termination of certain projects by the customers, the assessee, on the hope of getting some alternate projects retained its employees assigned to those projects. Since no new projects were received, the salary cost of these employees amounting to Rs.19,35,527/- was claimed as extraordinary item. Since the assessee had to retain employees who are assigned to certain projects which are terminated, therefore, in 25 ITA No.1896 & 1969/PN/2013 our opinion, salary cost of these employees has rightly been considered by the assessee as extraordinary item. As regarding the expenses of software team is concerned, we find the assessee during this year has debited such expenditure to the profit and loss account instead of capitalizing the same in the book as was done in earlier years. Since the projects in which the employees were working were terminated and the assessee was capitalizing the cost incurred in the book till earlier year has debited such expenses to the profit and loss account during this year, therefore, this in our opinion is also an extraordinary item.
40. We find in the case of Marebeni India Pvt. Ltd. (Supra) the assessee company had paid compensation for closure of its India units and this expenditure was claimed as normal expenditure. The Hon'ble Delhi High Court held that this expenditure would represent abnormal cost and the same has to be excluded while computing the operating margin. The relevant observation of the Hon'ble High Court reads as under :
"17. Question No.6 relates to the finding of the Tribunal that the expenses relating to the closure of the business were abnormal expenses and cannot be considered relevant while arriving at the ALP in respect of the international transaction. It also refers to the finding of the Tribunal that none of the comparable companies had incurred such expenses. The assessee had paid compensation for closure of its units, including the Delhi and Chennai offices, in an amount of Rs.68,97,992/-. The assessee sought inclusion of the compensation in the operating costs, on the footing that the closure of the units does not benefit the associated enterprise. It was further submitted by the assessee that its Indian business was being run as a totally independent unit with authority to the management in India to take decisions regarding closure of the offices in India. According to the assessee, the associated enterprise is not allowed to interfere in such decisions which are administrative in nature. The payment of compensation for closure of the Indian units was an abnormal item of expense and therefore, ought to have been excluded from the operating costs while arriving at the ALP of the international transaction. The case made out by the income tax department was that since the assessee is a captive 26 ITA No.1896 & 1969/PN/2013 unit of its associated enterprise, it was actually the latter which undertook the entire risk, that the associated enterprise was paying the assessee at the rate of cost plus 10 percent that if the Indian units are closed then the operating costs would correspondingly be reduced and therefore, the compensation paid would form part of the operating costs and would thus be relevant for arriving at the ALP.
18. The aforesaid issues were considered by the Tribunal. It noted that despite a specific direction issued by the CIT(Appeals), the assessee was unable to adduce any documentary evidence to show that the decision to close the Indian units was taken by the assessee independently and without being influenced by the associated enterprise. The Tribunal thus appears to have doubted the assessee's claim that it was an independent decision, taken without consulting the associated enterprise, to close down the Indian offices. The Tribunal further agreed that the stand taken by the revenue authorities that the closure of the Indian branches would correspondingly reduce the costs of the associated enterprise and therefore, it would be relevant item for consideration in the matter of arriving at the appropriate ALP. The Tribunal opined that transfer pricing is not an exact science and it is difficult to arrive at the ALP with any amount of certainty or definiteness; an element of guess work was always a part of the process. The Tribunal agreed with the assessee that the compensation received on account of closure of the Indian units may be a regular phenomenon but held that by closing down certain branches in India the assessee had actually reduced the costs of associated enterprise. It is according to the Tribunal meant that the closure of the branches had direct link with the international transaction. For these reasons the Tribunal held that the revenue was right in upholding that the costs of closure are not to be excluded from computing the operating expenses.
19. The contention of the counsel for the assessee before us is that the assessee was being compensated by way of a commission of fees by the associated enterprise and not on cost plus basis as erroneously held by the Tribunal. It was submitted that in this context, the compensation paid in connection with the closure of the Indian units represents abnormal costs which have to be excluded for determining the ALP. Counsel also posed the question whether the closure of the Indian units would benefit the associated enterprise and answered the same in the negative, and submitted that in such a case, the abnormal or external costs should not be taken into consideration while arriving at the ALP.
20. It may not be possible to lay down a formula that would be applicable universally to determine whether a particular expenditure or cost incurred by the assessee is a normal or abnormal item of expense, in cases relating to transfer pricing. If as held by the Tribunal, the assessee is compensated for its service on the basis of cost plus 10 percent then again the question may arise as to whether the compensation paid for closure of the Indian units can be considered to be normal or abnormal cost, because the compensation would directly depend or vary according to the quantum of the costs. In such case it would be relevant to consider whether the compensation paid for closure of the Indian units would amount to normal or abnormal expense. But as rightly pointed out by the counsel for the assessee, the assessee is being compensated by a fee or commission which has no 27 ITA No.1896 & 1969/PN/2013 connection with the costs incurred. This has been referred to even in the assessment order at paragraph 6.3 as follows:-
"For the agency and market support services, MIPL has received two kinds of remuneration.
a. handling commission - which varies from transaction to transaction and depends on the product, volume etc.; (during the proceedings the assessee was asked to give transaction wise break up of commission received but inability in this regard was expressed as it was stated that the transactions were numerous and could not collated);
b. Services fees - fixed fees for rendering marketing support in form of market survey etc."
The CIT (Appeals) proceeded to decide the issue on the basis that the assessee was unable to produce any document to show the circumstances under which the decision to close the offices was taken. He also assumed that the relevance of the closure of the Indian units and the payment of compensation both would hinge upon as to whose decision it was to close down the Indian units. He held that the decision was taken at the behest of the associated enterprises and therefore, for transfer-pricing purposes the assessee must be compensated by them and accordingly the costs of closure are not to be excluded for computing the operating expenses. The decision of the CIT(Appeals) was endorsed by the Tribunal which noted that since MCJ was paying the assessee on the basis of cost plus 10 percent, the a closure of the Indian units would automatically reduce the costs of the associated enterprise and therefore, would be a relevant issue for inclusion in the operating costs. In arriving at such a decision, it seems to us that the revenue authorities and the Tribunal failed to keep in mind that even according to the assessing officer, the assessee was being compensated for its agency and market support service by way of handling commission and fixed service fee. It seems rather remote that considering the nature of the remuneration received by the assessee from its associated enterprise, the payment of compensation on closure of the Indian offices would have any impact on the transfer pricing issue or in the fixing of the ALP. It therefore, appears to us that having regard to the nature and manner in which the assessee is remunerated for its services, the payment of compensation to the Indian units on their closure would represent abnormal costs which have to be excluded in the determination of the ALP. In our view, the income tax authorities as well as the Tribunal have erred in holding to the contrary. We accordingly, answer the question No.6 in the negative, in favour of the assessee and against the revenue.
41. The Delhi Bench of the Tribunal in the case of HCL Technologies BPO Services Ltd. (Supra) has held that while computing operating cost, abnormal costs incurred on account of start up of business like, salary, rent and depreciation etc. have to 28 ITA No.1896 & 1969/PN/2013 be excluded. Similarly, the Delhi Bench of the Tribunal in the case of Exxon Mobil Gas india Ltd. (Supra) has held that both non- operating incomes and non-operating expenses should be excluded while computing the net operating profit under TNMM. The Delhi Bench of the Tribunal in the case of Transwitch India Pvt. Ltd. (Supra) has held that the expenditure incurred on relocation of its office by the assessee, additional rent paid for two months and salary paid for unproductive/idle hours should be considered as non-operating expenses.
42. Since the assessee in the instant case has given full details of the various expenses justifying its treatment as non-operating expenditure, therefore, considering the totality of the facts of the case and in the light of the decisions cited above, we hold that the assessee was fully justified in adjusting the above expenses for computing its operating margin. Therefore, we set aside the order of the CIT(A) on this issue and direct the AO to compute the operating margin of the assessee company by adjusting the above expenses. Grounds raised by the assessee on this issue are accordingly allowed.
43. So far as ground of appeal No.3 is concerned the same relates to non granting of working capital adjustment in respect of comparable companies selected by the TPO.
44. After hearing both the sides, we find the different Benches of the Tribunal are consistently taking the view that adjustment on account of working capital should be provided. Although this ground was raised before the CIT(A) he has not adjudicated the issue. We find the Pune Bench of the Tribunal in the case of Ariston 29 ITA No.1896 & 1969/PN/2013 Thermo India Ltd. reported in 36 taxmann.com 501 at para 19-21 of the order has observed as under :
"19. In our considered opinion, the issue whether or not working capital requirements can constitute an item of difference so as to require an adjustment in the profit margin arising in comparable uncontrolled transactions while benchmarking the international transaction of the tested party, is no longer res-integra and has been subject matter of adjudication by the Tribunal in quite a few precedents. Of course, the adjustments permissible have to be within the para- meters provided in rule 10B(1)(e)(iii) of the Rules. We may observe that adjustment on the aspect of working capital difference between the tested party and the comparable uncontrolled entities/transactions is permissible only where the requirements of rule 10B(1)(e)(iii) r.w. rule 10B(3) of the Rules are satisfied. In this background, the learned counsel for the assessee stated that since assessee's plea has not been factually verified, it may be sent back to the Assessing Officer for verification.
20. The plea of the assessee has not been seriously opposed by the learned CIT(DR).
21. Therefore, we are inclined to remit the matter back to the file of the Assessing Officer who shall examine as to whether or not in the present case the working capital requirement constitute an item of difference so as to require adjustment as per the parameters laid down by rule 10B(1)(e)(iii) r.w.rule 10B(3) of the Rules for the purposes of analyzing the comparability of the comparable uncontrolled transactions with the international transactions of the assessee. Needless to say, the Assessing Officer shall allow the assessee a reasonable opportunity to put-forth material and submissions in support of its stand and only thereafter he shall pass an order afresh on this aspect as per law. Thus, on this aspect, assessee succeeds."
45. Respectfully following the decision of the Coordinate Bench of the Tribunal, we restore the issue to the file of the AO with a direction to decide the issue of working capital adjustment in the light of the decision of the Tribunal cited (Supra). This ground raised by the assessee is accordingly allowed for statistical purposes.
46. So far as appeal filed by the Revenue is concerned, the Revenue is aggrieved with the direction of the CIT(A) to include loss making concerns. The relevant observation of the CIT(A) has already been reproduced in the preceding paragraphs. In our opinion, if a company satisfies the FAR analysis the same should be included 30 ITA No.1896 & 1969/PN/2013 and only because it has incurred loss cannot be a ground to reject the same. The various decisions relied on by the Ld. Counsel for the assessee supports its case. The Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt. Ltd. reported in (2015) 56 taxmann.com 417 has held that mere fact of an entity makes high/extremely high profit/loss does not ipso facto lead to its exclusion from the list of comparables for purposes of determination of ALP. Similar view has been taken by the Pune Bench of the Tribunal in the case of Cummins Turbo Technologies Ltd. (Supra). The Tribunal at para 13 and 14 of the order has observed as under :
"13. We have also heard the Ld. DR. We find force in the argument of the Ld. Counsel. We find that the data base adopted by the assessee for selecting the comparables can be tested on FAR and there is likely to be some difference. Merely because some loss making companies are there those cannot be straightly rejected as com parables unless the abnormal loss is projected. As the same way, super profit comparables also should not be included. Transfer Pricing adjustment is not a law in strict sense though base on certain legal principles but it is arithmetic and while making the plus minus, the balance is required to be maintained. The OECD Guidelines, while providing guidance on the application of the transactional net margin method, states as follows:
"It is also important to take into account a range of results when using the transactional net margin method. The use of the range in this context could help reduce the effects of differences in the business characteristics of associated enterprises and any independent enterprises engaged in comparable uncontrolled transactions, because the range would permit results that would occur under a variety of commercial and financial condition."
14. We find that in respect of the selection of the comparables, the Tribunal has taken the consistent stand that as the super profit companies should not be included, the same way, super loss making companies should also be excluded. Though we agree with the TPO that some of the comparables for the purpose of PLI adopted by the assessee are showing the loss, but the burden is on the TPO to prove where those companies are consistently loss making companies. Moreover, except unsupported reasoning, no data has been brought on record by the TPO for excluding the comparables selected by the assessee in the Transfer Pricing study report. We, therefore, find no justification to the adjustment made u/s.92CA(3) of the Act. We accordingly delete the same. In the result, relevant grounds are allowed"
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47. In view of the decisions cited above and in view of the detailed reasoning given by the CIT(A), we find no infirmity in his order directing the AO to include the loss making companies also in the list of comparable companies. Grounds of appeal No. 1 to 4 by the Revenue are accordingly dismissed.
48. So far as ground of appeal No.5 is concerned, we find the revenue is aggrieved with the observation of the CIT(A) that once loss making companies are included in the list of comparable companies, then the average net margin of the comparable companies would fall within +/-5% of safe harbour range u/s.92C(2) and the addition made on account of transfer pricing adjustment should be deleted.
We do not find any infirmity in the above observation of the Ld.CIT(A). Therefore, ground of appeal No.5 by the revenue is dismissed.
49. Ground of appeal No.6 by the revenue being general in nature is dismissed.
50. In the result, the appeal filed by the assessee is allowed and the appeal filed by the revenue is dismissed.
Order pronounced in the open court on 31-08-2016.
Sd/- Sd/-
(VIKAS AWASTHY) (R.K. PANDA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
पण
ु े Pune; !दनांक Dated : 31 August, 2016.
st
सतीश
32
ITA No.1896 & 1969/PN/2013
आदे श क) *#त,ल!प अ-े!षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent
3. The CIT(A)-IT/TP, Pune
4. The CIT-IT/TP, Pune
5. #वभागीय &त&न'ध, आयकर अपील य अ'धकरण, "बी" पण ु े/ DR, ITAT, "B" Pune;
6.
गाड* फाईल / Guard file.
आदे शानस ु ार/ BY ORDER, // True Copy // //स या#पत &त //True व,र-ठ &नजी स'चव / Sr. Private Secretary आयकर अपील य अ'धकरण, पण ु े / ITAT, Pune