TaxTMI 
TaxTMI 
2015 (12) TMI 903
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....transactions. 3. Ld. TPO, after considering the TP report and taking into consideration the functional profile of the assessee, determined the ALP of services rendered at Rs. 22,24,02,990/- and since the price received was Rs. 18,03,75,500/-, directed for adjustment of Rs. 4,20,27,490/-. The other adjustment directed by ld. TPO was on account of accrual of interest on receivables, aggregating to Rs. 79,98,190/-. The assessee filed objections before ld. DRP. Ld. DRP issued directions on the basis of which the AO passed the final assessment order and made total TP adjustment of Rs. 2,67,22,563/-. Being aggrieved with the assessment order, the assessee is in appeal before us and has taken following grounds of appeal: "1. The assessment order passed by the Income Tax Officer, Coy. Ward 1(3), New Delhi [Learned Assessing Officer (Ld. AO')] pursuant to directions of the Hon'ble Dispute Resolution Panel (Hon'ble DRP') is bad in law. 2. The Hon'ble DRP erred both on the facts and in law, in cnfirming the addition to the extent of Rs. 26,722,563 to the income of the Appellant by holding that its international transaction pertaining to provision of in....
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....utstanding receivables from AE as "unsecured loans" and imputing interest at the rate equal to prime lending rate of SBI plus 150 basis points i.e 13.25%. 10. On the facts and in the circumstances of the case, the Ld. AO erred In initiating penalty proceedings under section 271 (1)( c) of the Act. 11. On the facts and in the circumstances of the case, the Ld. AO erred in levying interest under section 234B and 234D of the Act. 12 On facts and in law the Ld. AO made computational errors in calculating the tax payable and interest under section 234B and 234D of the Act. 4. Brief facts of the case are that the assessee is an Indian company and subsidiary of Actis LLP.UK. The group was established as a Private Equity Investment Fund. 99.99% shares of company were held by Actis International Ltd. and the balance one share was held by Actis Assets Ltd. The function of the assessee in the TP document had been summarized as a back office service provider to the AE Actis Capital LLP. Services provided were stated to be financial accounting function, fund accounting function, HR support function, IT support function etc. Thus, the functions of the assessee prima....
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....asis of these filters, applied by ld. TPO, ld. TPO rejected 10 comparables selected by assessee. This rejection was mainly on account of excluding those companies which had export sales less than 25% of the sales. The comparables selected by assessee in the TP study and the remarks of the ld. TPO on various comparables, were as under: S. No. Name of the Company Average (%) Remarks 1. AOK Inhouse BPO Services Ltd. 12.58% Rejected, as not fulfilling the filters 2. Aditya Birla Minacs Worldwide Ltd. 8.06% Rejected, as not fulfilling the filters 3. Cameo Corporate services Ltd. 9.77% Rejected, as not fulfilling the filters 4. Cosmic Global Ltd. 34.14% Accepted as it qualifies all the filters proposed by TPO 5. Delta Services (I) Pvt. Ltd. 6.67% Rejected, as not fulfilling the filters 6. Informed Technologies Ltd. 12.01% The company ahs ITES income less than 75%. Hence rejected 7. Infosys BPO Ltd. 24.29% 8. KNM Services Pvt. Ltd. . 13.69% Rejected, as not fulfilling the filters 9. Optimus Global Services Ltd. -1.85% Rejected, as not fulfilling the fi....
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....terest outstanding balance @ 16.75% which amounted to Rs. 98,96,044/- and made the addition of Rs. 79,98,190/-. 15. Before ld. DRP the assessee had filed its objections which have been considered from pages 24 to 25 of ld. DRP's order in which ld. DRP primarily accepted the ld. TPO's comparables on the ground that most of the comparables failed the export sales filter. As regards the adjustment on account of non-receipt of interest is concerned, ld. DRP gave the following directions: "The TPO/AO is accordingly directed to verify the amount of receivables: i) In case the aggregate amount of receivables from the AEs does not exceed Rs. 50 crores, apply Prime Lending Rate of SBI as on 30th June of relevant previous year plus 150 basis points (ii) In case the aggregate amount of receivables from the AEs excess Rs. 50 crores, apply Prime Lending Rate of SBI as on 30th June of relevant previous year plus 500 basis points." 16. Ground nos. 1 & 2 are general. Ld. counsel did not press ground nos. 3 & 4 and, accordingly, these grounds are dismissed as not pressed. 17. Apropos ground no. 5, ld. counsel for the assessee referred to page 14 of DRP's order wherein the findings....
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.... functionally same but the same takes into consideration only cost part and selling part cannot be ignored. She submitted that market does influence the price and, therefore, complete transaction has to be considered otherwise we will get distorted picture. 23. Ld. DR has filed detailed submissions in this regard, which are reproduced hereunder: (1) Provisions of Rule 10B(2)( d)- "conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail" (2) Export filter ensures that comparable entities are operating in the same geographical location. Those geographical markets, in which parties entering into transactions operate is an important factor which influences the price of the transactions. With the geographical market, in which the other party is located, all those factors which influence the transaction price also come into play. If we do not factor in this into our identif....
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....ts should be same or similar in the case of taxpayer and the comparable. In the case of tax payer, the operating market is abroad, whereas, in the case of a predominantly domestic company, the operating market is India, where here are differences in overall economic development, purchase power parity, business model, cost arbitrage and also level of competition (as India's share in global software services market is still low). Hence, it is felt that companies with at least 25% of its revenue from export sector will have similar economic circumstances as that of the tax payer. Therefore the companies that are predominantly into the domestic market cannot be compared with the assessee who is a predominantly export oriented service provider. (5) Following cases are relied in this regard. (i) Chiron Behring vaccines Pvt. Ltd. 2011-TII-30-ITAT Mumbai-TP. (ii) Deloitte consulting India Pvt. Ltd. ITA No. 1082IHYD/2010 Hyderabad-ITAT. (iii) ITO vs CRM Services India Pvt. Ltd. 14 Taxman 96. (a) Further there should be no comparability of transactions in the domestic and export segment, a proposition held by Hon. ITA T in the case of Chiron Behring Vaccines Pvt. Ltd. 2....
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....tus and not related to the domestic or export. Moreover, the Delhi Bench of the Tribunal in the case of Mentor graphics (supra) held that the ALP should be determined by taking results of a comparable transaction in comparable circumstances. Rule 10B(2)(d) also emphasizes that the comparability of the transaction should be international transaction. We do not find any merit in the argument of the learned counsel for the assessee that the companies rejected by the TPO operate in similar market condition do not have any international transaction. In view of the above, the reasoning given by the CIT(A) in confirming the action of the TPO in rejecting the aforesaid company as not comparable is justified. In view of the above, five companies listed above shall not be included in the final list of comparable companies. (c) Another judgment where this issue is discussed is ITO vs CRM Services India (P) Ltd. 14 Taxmann 96 as below: " 15. Ground no. 4.5 is against rejection of Shreejal info Hubs Ltd. As a comparable case. In this connection, it has been mentioned in the TPO's order that the assessee raised objection and it was submitted that this company is carrying ou....
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....ida) (P) Ltd. vs. Deputy Commissioner of Income Tax, Circle -6(1), New Delhi [2007] 109 ITD 101 (DELHI). Further it was also observed by the Hon'ble Tribunal in the ~case of Skoda Auto India Pvt. Ltd. 2009- TIOL-214-ITATPune that when information available in public domain is not sufficient to make the comparison possible some approximation and reasonable assumptions are inevitable. 24. We have considered the submissions of both the parties and have perused the record of the case. The main dispute is whether the filter of export sales to total sales of 25% applied by ld. TPO and accepted by ld. DRP is justified or not. This has resulted in exclusion of those comparables selected by assessee where export to total sales is less than 25%. Admittedly, the assessee is mainly an export oriented IT enabled service provider, deriving 100% of its revenues from exports in this segment. The contention of ld. counsel is that since it is not disputed that the comparables selected by assessee were functionally similar to that of assessee, therefore, by applying this filter of export sales of less than 25% for excluding the comparables is not justified because there is nothing in law to ad....
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.... including differences in accounting practices, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of gross profit margin in the open market; (v) the adjusted price arrived at under sub-clause (iv) is taken to be an arm's length price in respect of the purchase of the property or obtaining of the services by the enterprise from the associated enterprise; (c) cost plus method, by which,- (i) the direct and indirect costs of production incurred by the enterprise in respect of property transferred or services provided to an associated enterprise, are determined; (ii) the amount of a normal gross profit mark-up to such costs (computed according to the same accounting norms) arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transactions, is determined; (iii) the normal gross profit mark-up referred to in sub-clause (ii) is adjusted to take into acc....
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.... (iii), and in such a case the aggregate of the net profit allocated to the enterprise in the first instance together with the residual net profit apportioned to that enterprise on the basis of its relative contribution shall be taken to be the net profit arising to that enterprise from the international transaction; (e) transactional net margin method, by which,- (1) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such tra....
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....se factors have bearing on the net margin to be determined in all methods including TNM method. We are in agreement with the submission of ld. Sr. DR, reproduced earlier, that those geographical markets in which parties entering into transactions operate is an important factor which influence the price of the transaction and that has to be factored into for identification of uncontrolled transactions. Various case laws relied upon by ld. DR also fortify the view taken by us. For the sake of brevity, we are not referring to those decisions which have been elaborately considered in the submi1ssions of ld. DR, reproduced earlier. We, accordingly, reject this contention of ld. counsel for the assessee. 27. In the ground, the assessee has assailed exclusion of various comparables, which are as under:- - AOK In-House BPO Services Limited; - Aditya Birla Minacs Worldwide Ltd; - Cameo Corporate Services Ltd; - Delta Services (I) Pvt Ltd; - KNM Services Pvt Ltd; - Sparsh BPO Services Ltd; and - Timex Group India Ltd. 28. All these comparables had been excluded as they did not pass through export filter applied by ld. TPO. ....
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....business processes. Infosys BPO is a majority owned and controlled subsidiary of Infosys technologies Limited ("Infosys", NASDNM: INFY). The Company helps clients improve their competitive positioning by managing their business processes in addition to providing increased value. The name of the Company was changed from Progeon Limited to Infosys BPO Limited with effect from August 29,2006." 34. Ld. counsel submitted that this comparable has been excluded in plethora of decisions by the ITAT, particularly on the ground of economy of scale. In the synopsis filed by assessee, a list of all such cases has been annexed. 35. Ld. Sr. DR referred to the decision of the ITAT Delhi in the case of Agilent Technologies International Pvt. Ltd. Vs. ACIT (ITA no. 6047/Del/2012 dated 14- 6-2013), wherein it has been held that companies with extraordinary event such as merger or amalgamation should be rejected, if, because of merger/ demerger the company becomes functionally different. It was further held that if the merger of the two functionally similarly placed companies take place, the event of merger itself cannot be taken as a factor for exclusion of the said comparable. 36. Ld. Sr. ....
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....rtment has not brought on record any brand value of Actis on record. Moreover, the wide difference in turnover makes it clear that there is wide difference in the brand value of the two companies and, therefore, without quantification of the same, effect on turnover cannot be ascertained. We further find that the Infosys BPO has not been taken as comparable in detailed list annexed to synopsis filed by assessee including the following cases: - Zavata India Pvt. Ltd. Vs. DCIT (ItA no. 1781/Hyd/2011) - Capital IQW Information Systems (India) Pvt. Ltd. Vs. DCIT (Int. Taxation) (ITA no. 1961/Hyd/2011) - Triniti Advanced Software Labs (P) Ltd. (2011-TII-92-ItAT-Hyd-TP). Agnity India Technologies Vs. ITO ITA 1204/2011 Delhi High Court - In this case it was emphasized that Infosys Technologies Ltd. could not be considered as a comparable being a giant company. The same principle is applicable to Infosys BPO also. 42. In view of above discussion, we direct ld. TPO to exclude Infosys BPO. 43. In the result, ground no. 6 is allowed. 44. The next ground no. 7, raised by ld. counsel for the assessee is regarding inclusion of eClerx Services Limited. Ld. coun....
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.... engaged in rendering ITeS. The Tribunal held that, "once a service falls under the category of ITeS, then there is no sub-classification of segment". Thus, according to the Tribunal, no differentiation could be made between the entities rendering ITeS. We find it difficult to accept this view as it is contrary to the fundamental rationale of determining ALP by comparing controlled transactions/entities with similar uncontrolled transactions/entities. ITeS encompasses a wide spectrum of services that use Information Technology based delivery. Such services could include rendering highly technical services by qualified technical personnel, involving advanced skills and knowledge, such as engineering, design and support. While, on the other end of the spectrum ITeS would also include voice-based call centers that render routine customer support for their clients. Clearly, characteristics of the service rendered would be dissimilar. Further, both service providers cannot be considered to be functionally similar. Their business environment would be entirely different, the demand and supply for the services would be different, the assets and capital employed would differ, the competence....
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.... Yes Yes Yes Yes 50. Ld. counsel submitted that following the decision of ITAT Delhi Bench in the case of Motorola Solutions India Pvt. Ltd. Vs. ACIT (ITA no. 5637/Del/2011), the matter may be restored back to the file of ld. TPO for necessary risk adjustment after availing the services of technical experts to be appointed by both the parties. 51. Ld. DR referred to para 7.8 of ld. DRP's order and pointed out that when called upon to quantify the risk adjustment, the assessee filed reply, which was very vague and without any basis being backed by factual input, correlating its functioning, the functioning of the service sector and the functioning of the comparable companies. 52. We have considered the submissions of both the parties and have perused the record of the case. Ld. TPO had denied the risk adjustment claimed by assessee on the ground that assessee failed to show that the comparables had actually undertaken suck risk and failed to demonstrate how the same material affected from margins. He pointed out that unless it was shown that how the risk adjustment to fetch the result of each comparable and how the same would improve the comparability and unless....