TaxTMI 
TaxTMI 
2016 (1) TMI 1117
X X X X Extracts X X X X
X X X X Extracts X X X X
.... section 92CA(3) of the Act and subsequently confirmed by the Hon'ble Dispute Resolution Panel ('DRP'). Each of the ground is referred to separately, which may kindly be considered independent of each other. That, on the facts and circumstances of the case and in law: 1. The learned TPO / AO / DRP have erred in making an addition of INR 82,093,645 to the total income of the Appellant in respect of international transactions pertaining to provision of IT-enabled back-office services by the Appellant to its Associated Enterprises ("AEs") and imputed interest on outstanding inter-company receivables arising therefrom (hereinafter referred to as 'impugned transactions'). 2. The learned TPO / AO / DRP has erred by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income-tax Rules, 1962 ('the Rules'), and modifying the same for the determination of the Arm's Length Price ('ALP') of the impugned transactions to hold that the same are not at arm's length without returning a finding about existence of any of the circumstances specified in clauses (a) to (d) of sub-section (3) of sect....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed back office services to constitute a separate international transaction and proceeding to benchmark the same by application of Comparable Uncontrolled Price ("CUP") method. 13. learned AO has grossly erred in initiating penalty proceedings under section 271(1)(c) of the Act. 14. learned AO has erred in levying interest under section 234B and 234D of the Act while completely disregarding the provisions of the Act and the judicial precedence. Briefly stated, the facts of the case are that the assessee is a wholly owned subsidiary of Ameriprise, US, which parent company is engaged in the business of insurance, annuities, asset management and brokerage. The primary object of Ameriprise US is to provide services towards financial planning and other areas like institutional asset management and advisory, pension fund management, the management and administration of certain plans. The assessee was incorporated in August, 2005 and started operations in October, 2005. It is engaged in providing Information Technology (IT) enabled services to Ameriprise US. The assessee reported two international transactions, including remuneration from the `Provision of IT-enabled b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ee in respect of the international transaction of `Provision of IT-enabled back office services'. Page 2 onwards of the TPO's order enlists the functions performed by the assessee, which have been classified broadly into certain categories. The first category is `Financial services' which includes Accounting support, Mutual fund accounting, Sales and use tech support. Under this category, the assessee provides services to Ameriprise US in the nature of Credit purchasing cards, Bank reconciliation, Inter-company reconciliations, Maintenance of fixed asset registers and Payroll, etc. The second category is `Financial planning services', which refers to the assessee providing support in client data entry for assistance in preparation of draft reports for customers. The third broad category is `General counsel office' services, which includes E-discovery, Compliance, Profit and loss relations, Intellectual property claims and contracts drafting. This category refers to the assistance provided by the assessee in sorting legal cases and classifying them on the basis of reasons entailed therein and also assistance in drafting contracts for intellectual property claims. The next broad cate....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... present the customized/processed data in the form of reports/graphs/diagrams as the final output. 3.3 AIPL shall use the IT infrastructure in the form of computers, leased lines, etc., to process/customize the data and supply it to Ameriprise USA and, as applicable, its Designated Offices. 3.4 AIPL shall also render/undertake other Information Technology enabled activities of Back Office operations including Data Management, Information processing, Revenue accounting, Support Centre, Design or Implementation of Management Information Systems and Decision Support System, Financial Control Accounting Systems, Back Office/Remote Data Entry and any other similar activities. 3.5 AIPL shall also analyse the performance data of third party vendors appointed by Ameriprise USA in India for rendering of outsourced call centre and back office services. This would include: 3.5.1 Collection of data on performance of back office operations in India; 3.5.2 Analyse, evaluate and process such data into specified formats by applying information technology tools and provide suitable observations thereof. 3.6 To the extent necessary or de....
X X X X Extracts X X X X
X X X X Extracts X X X X
....." 8.2 The TPO discussed the functional comparability of this company and, in the ultimate analysis, came to hold that it was functionally comparable with the assessee company and hence includible. 8.3 We have heard the rival submissions and perused the relevant material on record. We have also gone through the Annual report of this company, a copy of which has been placed in the paper book. Notes to Accounts of this company, indicate about the amalgamation of Asscent Infoserve Pvt. Ltd. with it as approved by the shareholders in the court convened meeting held on 25.4.2009 and, subsequently, sanctioned by the Hon'ble High Court on 21.8.2009. The Mumbai Bench of the Tribunal in Petro Araldite (P) Ltd. Vs. DCIT (2013) 154 TTJ (Mum) 176, has held that a company cannot be considered as comparable because of exceptional financial results due to mergers/demergers. Similar view has been bolstered by the Delhi Bench of the Tribunal in several cases including Ciena India Pvt. Ltd. Vs. DCIT (ITA No.3324/Del/2013) vide its order dated 23.4.2015 and Techbook International P. Ltd. vs DCIT (ITA No. 240/Del/2015) vide its order dated 06.07.2015. In view of the fact that there was merger of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....omparable in Techbooks International Pvt. Ltd. (ITA No. 240/Del/2015) (AY 2010-11) for the same reasons (pg. 29 of the order- exceptional year of operations-acquisition of McCamish Ltd.)" 10.2 After considering the rival submissions and perusing the relevant material on record, we find from the Annual report of this company, that there was acquisition by this company of McCamish Systems LLC. Acquisition of McCamish Systems LLC during the year, being an extraordinary financial event, renders it incomparable. Following the reasons taken note of above, we order for the elimination of this company from the final set of comparables. 11. TCS E-Serve International Ltd. 11.1. The assessee objected to the inclusion of this company on the ground that there is exceptional rise in turnover and profits, as this is the second year of operations of the Company and first full-year as a step down subsidiary of TCS. It was also agitated that Company is functionally dissimilar and there are insufficient segmental information. The TPO noticed that this company was also offering ITES. He did not treat high turnover of this company as a relevant factor in considering the comparability. Eventual....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oftware development services. Software development services also include maintenance of software and updation of the software so as to suit the ever changing requirements of the users. A company using, inter alia, a software for obtaining the desired results, is called a company providing non-development software services. Thus, it is crystal clear that there is a phenomenal difference between a company providing software development services and a company providing software non-development services in terms of expertise, professional qualification and experience required for rendering such services. A company providing software non-development services performs a relatively low-end service. Thus the line of distinction is that whereas a company providing software development services helps in the creation, maintenance or updation of a software, on the other hand, a company providing non-development software services obtains the desired result with the use of an existing software. Further, whereas the output of the former is a software in itself or a stage in the ultimate creation of a software, the output of the later is the processed information from the raw data obtained with th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt financial year, the Company has received Income of Rs. 1,35,94,110/- from Transaction Processing and Other Services. On referring to Schedule 'O' - Notes to Accounts it is given that - "Background and principal activities TCS e-Serve Limited is engaged in the business of providing Informaiton Technology - Enables Services (ITES) / Business Process Outsourcing (BPO) services, primarily to Citigroup entities globally. The Company's operations broadly comprise of transaction processing and technical services. Transaction processing includes the broad spectrum of activities involving the processing, collections, customer care and payments in relation to the services offered by Citigroup to its corporate and retail clients. Technical services involve software testing, verification and validation of software at the time of implementation and data centre management activities." 12.3 We also note that 'Segmental Information' given in Point No. 8 of Schedule 'O' - Notes to Accounts in standalone financials of the annual report shows that Company is engaged in Business Process Outsourcing (transaction processing) services to the Banking & Financial Services I....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e carefully considered the reasoning given by coordinate Bench in the case of Techbook International P. Ltd. (supra). On perusal of Schedule 'O' - Notes to Accounts of the Standalone financials of the Company, it is clear that the Company is engaged in "transaction processing" and "technical services" activities. No separate segmental details are available. On a careful reading of the decision of coordinate Bench in Techbook International P. Ltd. (supra) it is clear that Schedule 'O' - Notes to Accounts in respect to carried out by Company and relevant segmental details were never brought to the attention of the Bench. We find that in the absence of the availability of any such segregation of the total revenue of this company, it is not possible to separately consider its profitability from rendering of `Transaction processing services'. Thus, the entity level figures render this company as unfit for comparison. Following the above reasons also taken note in the case of TCS e-Serve International Limited, we order for the elimination of this company from the final set of comparables. 13. eClerx Services Limited 13.1 The assessee objected to the inclusion of this comparable on ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y, 31st December and, hence, was not comparable. The ld. AR fairly accepted that the company was following calendar year for maintaining their accounts, in contrast to the assessee following financial year ending 31st March. It was, however, submitted that R System should not have been excluded for this reason alone when this company is otherwise functionally similar, a fact which has not been disputed by the TPO. The ld. DR opposed this contention by submitting that the data for the year ending of these companies was not similar to that of assessee company and hence such companies were rightly excluded. 14.2. After considering the rival submissions and perusing the relevant material, it is noticed that the assessee company is having financial year ending covering the period 1.4.2009 to 31.3.2010. In that view of the matter, a valid comparison can be made only if the comparable companies too have the same financial year. In this regard, we consider it appropriate to note the relevant part of sub-rule (4) of Rule 10B which provides that: "the data to be used in analyzing the comparability of an uncontrolled transaction with an international transaction shall be the data relating ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....imilarity of the relevant segment of this company. In such circumstances, the question arises as to whether the relevant segment of this company can be excluded from the list of comparables merely on the ground that the revenue from this segment is only Rs. 83 lacs? In our considered opinion, the quantum of turnover can be no reason for the exclusion of a company which is otherwise comparable. We find that Hon'ble jurisdictional High Court in the case of ChrysCapital Investment Advisors (India) P. Ltd. Vs. DCIT has held, vide its judgment dated 27.4.2015, that high turnover or high profit can be no reason to eliminate an otherwise comparable company. The same applies with full force in the converse manner as well to a low turnover/low profit company. We, therefore, hold that a company cannot be excluded from the list of comparables on the ground of its low turnover. In principle, we direct the inclusion of the relevant segment of this company in the list of comparables. The TPO is directed to include the operating profit/operating costs of the ITES segment of this company in the list of comparables, after due verification of the necessary figures for determination of the operating ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....not be viewed differently from sale proceeds. 16.4. In the context of transfer pricing, the Bangalore Bench of the Tribunal in SAP Labs India Pvt. Ltd. Vs ACIT (2011) 44 SOT 156 (Bangalore) has held that foreign exchange fluctuation gain is part of operating profit of the company and should be included in the operating revenue. Similar view has been taken in Trilogy E Business Software India (P) Ltd. Vs DCIT (2011) 47 SOT 45 (URO) (Bangalore). The Mumbai Bench of the Tribunal in S. Narendra Vs Addtl. CIT (2013) 32 taxman.com 196 has also laid down to this extent. In view of the foregoing discussion and respectfully following the view taken by Coordinate Bench in immediately preceding year, we are of the considered opinion that the amount of foreign exchange gain/loss arising out of revenue transactions is required to be considered as an item of operating revenue/cost, both of the assessee as well as comparables. We, therefore, hold that the AO was not justified in considering forex loss as non-operating cost as against the assessee's claim of operating cost. 16.5. With the above remarks, we set aside the impugned order and send the matter back to the file of TPO/AO for determ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....international transaction of debt arising during the course of business. The TPO has calculated TP adjustment on account of interest on outstanding debts beyond a period of 30 days by noting the number of days after which the relevant invoice was realized. From this Table given on page 83 of the TPO's order, it can be seen that the days of realization range from the lowest of two days to the highest of 59 days from the date of the respective invoice. The TPO has considered interest of a period of 30 days as a part of invoice value and computed this TP adjustment only where the realization has been made beyond 30 days. A reading of the Agreement dated 1.10.2005 between the assessee and Ameriprise US manifests that clause 6 deals with 'Price and payment.' Para 6.5 of the Agreement provides as under: "6.5 All payments shall be made on the basis of the invoices raised by AIPL and shall be cleared within thirty days from the date of the invoice. Under no circumstances shall the payment be delayed for more than sixty days from the date of the invoice. Any revision to the credit period may be agreed by parties by exchanging e-mails or other forms of correspondence without requiri....
X X X X Extracts X X X X
X X X X Extracts X X X X
....apital adjustment in the international transaction of rendering of services. In our considered opinion, both the transactions are separate and distinct from each other. Whereas the international transaction of rendering services contemplates comparison of the price charged for rendering services by impliedly including the interest for the period allowed for realization of invoices as per the terms of the agreement, the international transaction of charging interest on late recovery of trade receivable covers the period which starts with the termination of the period of credit allowed under the agreement, which is subject matter of the international transaction of rendering of services. There is one more fallacy in the reasoning given by the DRP about the subsuming of interest income in the working capital adjustment. It is simple that working capital adjustment is ordinarily computed by considering the average of the opening and closing values of inventories, receivables and payables. The TP adjustment on account of interest on delayed realization of invoice value has nothing to do with the closing or opening values. It depends on the period of realization on transaction to transac....