TaxTMI 
TaxTMI 
TaxTMI 
2014 (9) TMI 125
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....ts, notes to financial statements, audit reports, etc. through utilization of tools developed in house and also prepares business descriptions, biographies of key executives and tracks key developments in the companies. Assessee functions as a captive contract service provider. For the assessment year 2009-10, assessee filed return of income on 30.9.2009 declaring an income of Rs. 29,22,01,881. The Assessing Officer vide his draft assessment order enhanced the total income of assessee to Rs. 46,10,25,879, on account of transfer pricing adjustment of Rs. 15,20,07,732 in accordance with the Transfer Pricing Order passed under S.92CA(3) by the Addl. Commissioner of Income-tax TP II, Hyderabad(TPO). Assessee has reported Operating Revenue of Rs. 179,67,97,166 and an Operating Cost of Rs. 155.62, crores resulting in operating profit of Rs. 24.06 crores. The OP/OC was arrived at 15.46%. The entire turnover of assessee is receipts from its AE as ITES provider. 4. Assessee in its Transfer Pricing Study undertaken by M/s. S.R. Batliboi & Co. selected itself as the tested party, and it has been characterized as provider of IT enabled services and selected TNMM as the most appropriate method....
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....regarding payment of gratuity, on which the revenue is in cross appeal. 8. As the DRP confirmed the Transfer Pricing adjustment made by the Assessing Officer and the TPO, assessee is in appeal before us, raising Grounds 1 to 9, which we shall consider in the later part of this order. 9. Ground No.10 pertains to not allowing credit for correct amount of TDS of Rs. 2,28,156 claimed by assessee in the return of income, which requires verification by the Assessing Officer. We direct the Assessing Officer accordingly to verify the claim made by assessee and allow the credit for correct amount of TDS. 10. Ground No.11 pertains to computing interest under S.234B. It was the contention of assessee that the interest was wrongly computed at Rs. 3,13,02,184 on the assessed income, as against the correct amount of Rs. 3,00,01,783. This also requires verification of the computation of interest. Therefore, we direct the Assessing Officer to verify and re-determine the interest accordingly. 11. Now coming to the main grounds, viz. grounds No.1 to 9, on transfer Pricing adjustments made by the Assessing Officer/TPO, assessee has raised grounds on various aspects of Transfer Pricing adjustments....
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.... not in agreement with the contentions of the comparability on turnover ratio of assessee with this company on the ground that assessee's turnover is about Rs. 129.8 crores, which as against turnover of Rs. 1016 crores of the Infosys, ( which is only about 5 times) we are of the view that other contentions with regard to the brand value and brand building exercise, having huge asset base, can be considered to arrive at the conclusion that Infosys is functionally not similar to that of assessee. Infosys BPO stands on its own as an exclusive BPO of the Infosys Technologies and in earlier years, generally Infosys BPO is excluded in many of the cases. Considering these aspects, we are of the opinion that even though the profits of the Infosys BPO Ltd. is reasonable and no super profits are earned, just because of its big brand value, this company has to be excluded on the grounds of functional dissimilarity on FAR Analysis. Therefore, we direct the Assessing Officer/TPO to exclude this company. (2) Genesys International Ltd. 17. It was the contention that this company functions in two horizontals, and is having super profits. It was further submitted that this company is not only in ....
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....on Technology Enabled Services' (ITES), but most of them are quite distinguishable from others. In our considered opinion, the fifteen broad categories set out in this Circular cannot per se be claimed as similar to each other. A cursory look at these products/services transpires that some of them are functionally quite different from each other. Further the level of investment required for providing such services is also not consistent. In our considered opinion, the mere fact that two services are placed under this category do not become automatically comparable. If a case providing one category of services under ITES is claimed as comparable with another in the category of service under ITES as per this circular, then it must be shown ex facie that it is broadly similar. Adverting to the facts of the instant case, we find that the services rendered by Genesys fall under clause (vi) with the heading 'Geographical Information Systems Services', whereas those rendered by the assessee fall partly under clause (vii) with the heading 'Human Resources Services' and partly under clause (xi) with the heading 'Payroll'. On juxtaposition examination of these two sets of services, we find t....
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....erefore, direct the Assessing Officer/TPO to exclude this company. (4) Cosmic Global Ltd. 19. The main objection of assessee with reference to the inclusion of this company is with reference to outsourcing of its main activity. Even though this company is in assessee's TP study, it has raised objection before the TPO that this company's employee cost is less than 21.30% and most of the cost is with reference to the outsourcing charges or translation charges, and as such this is not a comparable company. The TPO, though considered these submissions, rejected the same, on the reason that this does not impact the profit margin of the company. Opposing the view taken by the TPO, it is submitted that this company cannot be selected as comparable, as similar issue was discussed by the coordinate Bench of the Tribunal(Delhi) in the case of Mercer Consulting (India) P. Ltd. (supra), vide paras 13.2 to 13.3 which read as under- "13.2. Now coming to the factual matrix of this case, we find from the material on record that outsourcing charges of this case constitute 57.31% of the total operating costs. This does not appear to us to be a valid reason for eliminating this case from the list ....
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.... (Seg.) 20. The objection of assessee with reference to this company is that the company is involved in engineering design services and high end services and has products in its inventory. It is also involved in R&D activity and developing sophisticated delivery system. It was further submitted that this company is not functionally comparable at segment level also, as engineering design services are high end services, as considered in other cases. It is further submitted that allocation of expenses between segments is not possible and depreciation was not allocated between the segments. There are extra-ordinary events which impact profit also, as can be seen from the Annual Reports. It is further submitted that this company is not selected in the list of comparables selected in the case of Mercer Consulting (India) Pvt. Ltd. and therefore, selection of the company by the TPO in this case, which is also in similar ITES services, is not proper. 20.1 After considering the rival contentions, we agree with the objections raised by assessee. As seen from the Annual Report, this company is involved in engineering design services and has products also, which makes it functionally not com....
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.... dated 6.6.2014. As seen from the TPO's order on comparables selected by the tax payer, this company is rejected as it fails export sales filter which was determined at 74.45% of its service revenue. On similar reason, the coordinate Bench in the above referred case has analysed and directed the TPO to include the said comparable, by stating as under- "9.1. This case was included by the assessee in the list of comparables which was excluded by the TPO on the ground of diminishing sales for the last three years and the export revenues less than 75% of the total turnover. Here, it is relevant to mention that the TPO adopted certain filters which have been mentioned on pages 13 and 14 of his order. One of such filters is the exclusion of companies whose export sales are less than 75% of the total sales from ITES. Another filter applied by the TPO is the exclusion of cases with diminishing revenues. The TPO recorded that this company has some peculiar problems and hence the same is not in line with the growth in software industry. However, he did not delve into the actual figures of diminishing revenues of this company. As against this, it is observed that Allsec's operating revenue h....
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....nd the export revenue of Allsec Technologies is 74.45% as against the TPO's filter of 75%, we are of the considered opinion that the same cannot be excluded for such a minuscule difference if it is otherwise comparable. It is patent that the TPO has not disputed the otherwise functional comparability of this case with that of the assessee. If we consider the case of Allsec Technologies on a criteria of preponderance of comparability, we find that the same merits inclusion in the list of comparables. Not only the TPO's reasoning about the declining revenue of Allsec Technologies over a period of three years is incorrect, this case is also passing the test of the ratio of export turnover to total turnover on a pragmatic rational basis. We, therefore, hold that this case should be included in the list of comparables." For the reasons stated above, we are of the opinion that in this case also, this company should be included as a comparable. We direct the Assessing Officer/TPO accordingly. (b) Cepha Imaging P. Ltd. 24. As for this company sought to be included as a comparable by the assessee, but excluded by the TPO, we find that this company was also analysed by the coordinate Benc....
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....accordingly rejected. 28. In the result, assessee's appeal, being ITA No.124/Hyd/2014, is considered as partly allowed. 29. Now turning to the appeal of the Revenue, viz. ITA No.170/Hyd/2014, the grievance of the Revenue is on the issue of direction of the DRP in allowing deduction of contribution to the Gratuity Fund maintained with LIC. The Assessing Officer noticed that the assessee debited an amount of Rs. 2,39,40,993 to the Profit & Loss Account on account of gratuity expenses. Out of the said amount, an amount of Rs. 73,46,402 was disallowed under S.43B in the computation statement itself by the assessee. Net amount of Rs. 1,66,94,591 was claimed as gratuity expenditure. The Assessing Officer disallowed the said amount on the reason that the said gratuity fund by the LIC was not approved by the Commissioner of Income- tax Hyderabad. Even though the assessee made the application for approval in the year 2004 itself, the Commissioner of Income-tax seems to have granted approval to the Gratuity Scheme with effect from 29.5.2012. On that reason, since the scheme was not approved for assessment year 2009-10, the Assessing Officer disallowed the amount claimed in the Draft assess....