TaxTMI 
TaxTMI 
2017 (4) TMI 358
X X X X Extracts X X X X
X X X X Extracts X X X X
....e was processed u/s 143(1) of the Act. Subsequently, the case was selected for scrutiny and notices u/s 143(2) and 142(1) were issued, against which, the AR of the assessee furnished information/details called for. Thereafter, the AO completed the assessment u/s 143(3) r.w.s. 92CA r.w.s. 144C of the Act and determined the total income of the assessee at Rs. 22,31,19,883/- by making the following additions.: 1. Delayed payment of employees contribution to PF 2. Taxing of accrued income shown as unmatured advances in the balance sheet. 3. Arm's length Price determined by TPO u/s 92CA of the Act. 3. Aggrieved with the above order, the assessee preferred an appeal before the CIT(A) against the additions in respect of accrued income shown as unmatured advances and Arm's length price adjustment u/s 92CA of the Act. 4. As regards the issue of taxing of accrued income shown as unmatured advances in the balance sheet, the CIT(A) after considering the submissions of the assessee and relying on the decision of the coordinate bench of this Tribunal in assessee's own case for the Previous Year, deleted the addition made by the AO. 5. As regards the addition in respect of international tra....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ses on these receipts and postponement of all these receipts results in distortion of true profits. 4. Whatever be the method followed, recognition of revenue has to be in consonance with the method of accounting so followed vis-à-vis the nature and character of the amount accrued or received and the year of such accrual or receipt [State Bank of Travancore 158 ITR 102 (SC)]. The Assessing Officer has the power to adopt the correct method of valuation of closing stock instead of wrong method adopted by the assessee for a long period. Method of stock valuation followed should not only be consistent but should also be correct. British Paints India Limited 188 ITR 44 (SC). Similar issue is involved in the assessee's own case and additions were made on this issue for the assessment years 2004-05 to 2006-07. Accordingly, the unmatured income of Rs. 51,02,38,034/- is treated as assessee's income. In this case, while completing the scrutiny assessment for the assessment year 2006-07, the unmatured income/advance shown of Rs. 30,11,23,732/- was taxed as income. In the assessment year 2007-08, the assessee offered these advances as receipts and therefore, these amounts are ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as Bench in the case of Sakura Electronics (P) Ltd. allowed the claim of the assessee. The contention of the learned Departmental Representative was that since the assessee has accounted for only proportional receipt, credit for the entire TDS cannot be allowed. On the other hand, the learned counsel supported the order of the CIT(A). On due consideration of the matter, we uphold the order of the CIT(A). Whether a particular Accounting Standard has been notified or not is not material. What is to be seen is whether the assessee has followed a recognized method of accounting or not. If method followed by the assessee is such whereby correct income cannot be deduced, then only the assessing officer has the authority to adopt a reasonable basis to determine the total income. In the instant case,. It cannot be disputed that the assessee has followed a recognized method of accounting and hence, there is no question of adding any further amount to the total income. There being no infirmity in the order of the CIT(A), we uphold the same." Therefore, we do not find any infirmity in the order of the CIT(A) in deleting the addition made by the AO following the decision of the ITAT and, ac....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s. 176.5% on cost, the assessee did not work out any comparables. 13.2 The assessee submitted that TPO has adopted mark up of 36.41% and subsequently, after considering the objections of assessee, TPO has reduced the mark up to 30.21%. Assessee further submitted that TPO has increased the operating cost of international transactions to Rs. 11,10,31,660/- as against the cost of Rs. 7,89,354,010/- as declared by the assessee . On the operating cost of Rs. 11,10,31,660/-, the TPO has adopted the ALP margin of 30.21% and determined the ALP at Rs. 14,45,74,324/-. Accordingly, determined the ALP adjustment of Rs. 4,59,33,797/-. 13.3 Assessee submitted that TPO has committed a mistake by increasing the cost incurred by the assessee in international transactions, TPO treated the entire cost of business of the assessee as one involved in international transactions, computed percentage of loss on overall basis and computed the cost by applying that percentage to the international turnover shown. 13.4 As regards the other issue relates to the percentage of mark up recommended by the TPO, the assessee submitted that the activity carried out in BPO is a non-technical activities carried out b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on on computers and head phones would be enough to account for all the costs relating to BPO services. The operating costs have not been determined correctly by the appellant. 3. The Transfer Pricing Officer pointed out that the appellant has wrongly picked 20 suitable companies only to justify its markup. The Transfer Pricing Officer has rightly pointed out that no filters have been applied by the appellant and that the results of companies so chosen are not really incredible. 4. The Transfer Pricing Officer has rightly stated that the appellant is mainly in IT enabled services. However, he has compared the results of the International Transactions of the appellant in part with some software developing companies. The appellant has not developed any software. 5. The appellant has pointed out that some of the facts mentioned by the Transfer Pricing Officer actually relate to some other companies and are not really relevant. This observation is partly correct. However, I find that the filters applied by the Transfer Pricing Officer are as follows: * Companies whose data is not available for the FY 2006-07 were excluded. * Companies whose IT enabled service revenue <Rs 1 cr. Were....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lutions Ltd.) This company is considered as a comparable by the TPO even for the current AY 2007-08. 16.10 Ace Software Exports Ltd This company is not considered as a comparable by the TPO for the current AY 2007-08 as the company has declining revenues for the last three year upto and including the FY 2006-07. 16.11 Apex Knowledge Solutions Pvt Ltd This company is considered as a comparable by the TPO even for the current AY 2007-08. 16.12 R Systems International Ltd (Seg.) This company is considered as a comparable by the TPO even for the current AY 2007-08. 16.13 Flextronics Software Systems Ltd (Seg.) This company is considered as a comparable by the TPO even for the current AY 2007-08. A plain reading of the above in this case reveals that the Transfer Pricing Officer has written certain things which are factually incorrect. There is no order in the case of the appellant under section 92CA for Asst. Year 2006-07. Obviously, the Transfer Pricing Officer has quoted this with reference to some other tax payer and not the appellant. The appellant has also categorically stated that there was no such order for the earlier year. 7. From the filters given above, I see that....
X X X X Extracts X X X X
X X X X Extracts X X X X
....engineering services and not into services offered by the appellant 5.3 From the above discussions, I find that whereas it is correct to say that the appellant has not taken all expenses Into account and has artificially shown 15% markup on selected cost. On the other hand, the Transfer Pricing Officer has applied incorrect filters and has compared the appellant's results with those of primarily incomparable companies. Therefore, I find that the calculation with respect to actual operating costs calculated by the TPO at Rs. 11,10,31,660/- are correctly calculated because such costs with respect to IT enabled services for exports are not very different from those of the appellant. These costs have also not taken into account any working capital adjustments as the appellant has stated that such an adjustment is not required. On the other hand, the margin of 30.21% is not correct. I hold that the margin of 15% of costs as taken by the appellant would be the correct margin. The cost would be Rs. 11,10,31,660/- as already stated and the arm's length price would work out to Rs. 12,76,86,409/-. The appellant gets relief accordingly." 15. Before us, the ld. AR submitted that asse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or statistical purposes as far as AY 2007-08 is concerned. ITA No. 49/H/13 for AY 2008-09 by the revenue and ITA No. 69/H/13 for AY 2008-09 by the assessee. 19. As regards ground Nos. 2&3 raised by the revenue regarding accrued income shown as unmatured advances amounting to Rs. 16,96,48,620/-, similar issue has been decided by us in AY 2007-08 in revenue's appeal. As the issue is materially identical to that of AY 2007-08, we uphold the order of the CIT(A) in deleting the said addition and accordingly, dismiss the grounds raised by the revenue. 20. As regards the ground Nos. 1 to 3( a to j) raised by the assessee regarding the addition of Rs. 7,25,22,986/- in respect of international transactions, in the previous year relevant to the assessment year, the assessee-company made certain international transactions pertaining to BPO services to associated enterprises viz. Monster Worldwide Inc., USA Monster Worldwide Ltd., UK and Monster SG Pte Ltd., Singapore. Hence, AO through letter dt.30.7.2010, a reference has been made to the Transfer Pricing Officer for determination of Arm's Length Price. The Transfer Pricing Officer vide his order u/s.92CA(3) of the Income Tax Act dt 28....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... and ITA No. 872/H/14 for AY 2009-10 by the assessee. 28. As regards ground Nos. 1&2 raised by the revenue regarding accrued income shown as unmatured advances amounting to Rs. 60,26,51,868/-, similar issue has been decided by us in AY 2007-08 in revenue's appeal. As the issue is materially identical to that of AY 2007-08, we uphold the order of the CIT(A) in deleting the said addition and dismiss the grounds raised by the revenue. 29. As regards the ground Nos. 1 to 3 ( a to g) pertaining to transfer pricing adjustment of Rs. 85,79,248/- u/s 92CA of the Act, by the assessee, it is observed that as per 3CEB report, the international transactions reflected are as under: AE Nature of transaction Amount (Rs.) Monster Worldwide Inc., Provisions of BPO services 8,67,01,622 Monster SG Pte Ltd., Singapore -do- 1,36,76,045 Monster Technologies Malaysia Sds Bhd. -do- 42,71,726 Monster Worldwide Canada Commission received 89,374 Monster SG Pte Ltd., Singapore -do- 9,28,485 Monster Worldwide Ltd., UK -do- 29,84,778 Monster.com HK Ltd. -do- 3,63,603 E-career Z(Beijing) Ltd. -do- 33,052 Job Korea Co. Ltd. -do- 3,416 Monster Jobs Mexico S.De R.L.de.CV -do- 28,5....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s issued to the assessee and its response was solicited. The assessee has filed its reply on 01/11/2012 and 05/12/2012. 29.5 After considering the submissions of the assessee, the TPO has arrived the arm's length margin at 24.67% and the arm's length price on provisions of ITES was determined at Rs. 11,34,49,059/- and a sum of Rs. 85,79,248/- was treated as adjustment u/s 92C(3) of the Act, by which the income was enhanced. 30. When the assessee preferred an appeal before the CIT(A), the CIT(A) following his decision in AY 2008-09, confirmed the TP adjustment made by the AO/TPO. 31. Aggrieved by the order of the CIT(A), the assessee is in appeal before us. 32. In addition to the regular grounds of appeal, the assessee has raised additional grounds, which are as under: "1. The lower authorities are not justified in adopting, as comparables, the following companies - 1) Accentia Technologies Ltd., 2) Acro Petal Technologies Ltd., 3) Cosmic Global Ltd., 4) eClerx Services Ltd., 5) Genesis International Ltd., and 6) Infosyms BPO Ltd., 2. The lower authorities should have seen that these companies were held by the ITAT to be as not comparables in their order, in cases similar to o....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... Further, it also has huge asset base and therefore, this company is not functionally comparable to assessee. Assessee relied on the decision of the Hon'ble Delhi High Court in the case of CIT V/s. Agnity India Technologies Pvt. Ltd. (2013) 219 Taxman 26 (Del), wherein it was held that huge turnover companies like Infosys and Wipro cannot be considered as comparable to smaller companies like assessee. 16.1 Even though we are 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 reasonabl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....From the very description of such services, it is palpable that even though these fall under the overall ITES category, but some of them are quite different from each other. To cite, service at Sl.No. (vi) of this Circular is 'Geographic Information System services and at Sl. No. (vii) is 'Human Resources Services.' No doubt, all these fifteen categories of products/services have been included under the major head of 'Information 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 b....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the companies should be excluded. 18.2 We have considered the issue and examined the Annual Report and the objections of assessee. As seen from the Annual Report, the above company is involved in diverse nature of services and there was no segmental data for diversified service port folio. Moreover this company can be considered as KPO and we are of the opinion that this company is not comparable to assessee's services. We therefore, 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 issu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ven above would fully apply to hold Cosmic Global Limited as incomparable. This case is, therefore, directed to be excluded from the list of comparables." In view of the detailed analysis of the coordinate Bench of the Tribunal in the above referred case, in this case also we accept the contentions of assessee and direct the Assessing Officer/TPO to exclude this comparable for the same reasons. 5) Acropetal Technologies Ltd. (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 comp....