TaxTMI 
TaxTMI 
2016 (9) TMI 1308
X X X X Extracts X X X X
X X X X Extracts X X X X
....ination of the ALP u/s 92CA(4) of the Act. The TPO vide his order dated 31.10.2013 proposed an adjustment on account of provisions of ITES for Rs. 7,69,69,407 and interest receivable of Rs. 88,17,946 totalling to a sum of Rs. 8,57,87,353 u/s 92CA(3) of the I.T. Act and also held that as per the proviso to subsection (4) of section 92C, no deduction is allowable u/s 10A on the enhanced Arms Length Price adjustment. Aggrieved, the assessee preferred its objection before the DRP and the DRP vide its order dated 8.12.2015, determined the average margin of the comparables for excluding three comparables i.e. Infosys BPO Ltd, TCS E-Serve Ltd and M/s. E-clerx Services Ltd. The DRP also directed the AO to exclude Accentia Technologies Ltd from the list of comparables, if on verification it is found that the extra ordinary event of amalgamation during the year is found to have impact on the profits of the Company. After excluding the above 3 companies from the list of 11 comparables, the average margin of the 8 comparables came to 20.69%. After verification of extra ordinary event and its impact, profit in the case of Accentia Technologies Ltd, that the TPO could not find any effect of amal....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Tribunal in rejecting the assessee's objections. For the sake of ready reference the relevant paragraph is reproduced hereunder: "17.0 Ground of objection No.13 - Foreign Exchange income/expenses should be considered as nonoperating for computation of margins-The assessee submitted that foreign exchange gain/loss should be considered as non-operating for computation of margin of the assessee and the comparables. In this regard, the assessee contended the stand taken by the learned TPO and places reliance on the decision of Mumbai Tribunal in case of DHL Express (India) Pvt. Ltd (ITA No.7360/Mum/2010) wherein it was held that foreign exchange fluctuations do not form part of the operational income because these items have nothing to do with the main operations of the assessee. Decision: The TPO has clearly stated in the TP order that the foreign exchange loss forms part of the operating margins for the reason that as per the requirements of AS-11 issued by ICAI, foreign exchange gain/loss of any nature relating to any item whatsoever is required to be charged off to the P&L a/c. This position has been consistent with the extant practice. He also stated that the Ho....
X X X X Extracts X X X X
X X X X Extracts X X X X
....olved in the transactions with AEs alone, which have to be considered for computation of ALP. The AO/ TPO are accordingly directed to take into account the turnover of the transactions with AE only for the purpose of computing the ALP. Accordingly, grounds No.3 and 4 are treated as allowed for statistical purposes". Respectfully following the decision of the Coordinate Bench to which both of us are signatory, we direct the AO/TPO of the assessee herein also to take into account the turnover of the transactions with AE only for the purpose of computing the ALP. Ground No.5 is treated as allowed for statistical purposes. 6. As regards Ground No.6, the assessee is challenging the inclusion of the following companies in the final list of comparables: a) Accentia Technologies Ltd b) Cosmic Global Ltd c) TCS e-Serve International Limited & d) Crossdomain Solutions Pvt. Ltd. In addition to the above, assessee vide additional grounds of appeal (6.1 and 6.2) is also challenging the comparability of Cosmic Global Ltd and Crossdomain Solutions Pvt. Ltd as comparables with the assessee. It is stated in the application for admission of additional grounds that....
X X X X Extracts X X X X
X X X X Extracts X X X X
....PO has considered all the relevant facts before holding that the said company is comparable to the assessee. 8. Having regard to the rival contentions and the material on record, we find that the DRP has directed the AO to consider whether the extra ordinary event of amalgamation during the year is found to have an impact on the profits of the company. We find that instead of carrying out the exercise, the AO has simply followed the order of the TPO in holding that the fact of amalgamation on the margin of the said company has no effect on the margin of the said company. This, in our opinion, is not a correct approach of the AO. Where a direction has been given by the DRP to follow a certain procedures, the AO has simply followed the TPO order. Therefore, order of the AO on this issue needs to be set aside. In the case of Hyundai Motors which is also engaged in rendering of ITES to its AEs, the Tribunal has taken note of the same at para 9.1 and 9.3 of its order. Therefore, the decision of the Tribunal in the said case is applicable to the case on hand, more particularly since the comparables adopted by the TPO in the said case are the same in the assessee's case also. In the ca....
X X X X Extracts X X X X
X X X X Extracts X X X X
....has to be excluded from the list of comparables as rightly done by the DRP. Therefore, we do not see any reason to interfere with the order of the DRP on this company also. Accordingly, ground No.3 of the Revenue is dismissed". Since the order of the Tribunal in the case of Hyundai Motors for the same A.Y, we direct the AO/TPO to exclude this company from the final list of comparables. 9. As regards the comparability of Cosmic Global it is the case of the assessee that this company is primarily engaged in the activities pertain to transactions, medical transcription and consultancy services and is significantly different from ITES activities performed by the assessee. He has drawn our attention to the Annual Report of Cosmic Global Ltd wherein the major revenue from medical transcription and consultancy services and translation charges as against a meager Rs. 26,97,430 from the accounts. According to the assessee, the Cosmic Global Ltd earns only 4.66% of total sales from ITES activities and in the assessee's own case for the A.Y 2009-10, this company was rejected by the ITAT due to insignificant revenue from ITES segment. Without prejudice to the above argument, the learned ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... This does not appear to us to be a valid reason for eliminating this case from the list of comparables. On going through the Annual accounts of Cosmic Global Limited, a copy of which has been placed on record, we find that its total revenue from operations are at Rs. 7.37 crore divided into three segments, namely, Medical transcription and consultancy services at Rs. 9. 90 lacs, Translation charges at Rs. 6.99 crore and Accounts BPO at Rs. 27.76 lac. The Id.AR has made out a case that outsourcing activity carried out by this company constitutes 57% of total expenses. The reason for which we are not agreeable with the Id. AR is that we have to examine the revenue of this case only from Accounts BPO segment and not on the entity level, being also from Medical transcription and Translation charges. When we are examining the results of this company from the Accounts BPO segment alone, there is no need to examine the position under other segments. The entire outsourcing is confined to Translation charges paid at Rs. 3.00 crore, which is strictly in the realm of the Translation segment, revenues from which are to the tune of Rs. 6.99 crore. If this segment of Translation is not under co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....company with the assessee, the learned Counsel for the assessee submitted that the TCS international also provides software testing, verification and validation which are different from ITES services providers by the assessee. It is also submitted that the segmental information of TCS International are not available in the annual report. The exceptional circumstances of the company reported in annual report such as acquisition of India based captive business outsourcing arm, resulting in acquisition of an aggregate amount of $ 2.5 billion over a period of 9.5 years and its impact on the financial implications of the company also brought to our notice. It is submitted that these peculiar circumstances have been considered by the Coordinate Bench of this Tribunal in the case of Hyundai Motor India Engineering for exclusion of the list of comparables. We find that in the case of Hyundai Motors at Para 11 of its order read as under: "11. We find that the assessee had raised its objections in detail against the adoption of these two companies as comparables both before the TPO as well as DRP, but its objections were rejected. Before us also, the Ld. Counsel for the assessee rei....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ces India Ltd., to hold that there are exceptional circumstances during the relevant financial year due to which this company is not comparable to the assessee. The Ld. Counsel for the assessee also submitted that the segmental details of this company are not available and hence, has to be excluded on this count also. 11.2.2. We find that the assessee's contentions about the presence of 'brand value' and owning of 'intangibles' is supported by the evidence on record. However, as regards the extraordinary event or exceptional circumstance there is no material placed before us by the Ld. Counsel for the assessee. Therefore, merely because the TPO in another case has held that there is an extraordinary event for which this company has to be excluded from the list of comparables, it cannot be excluded. Such claim has to be supported by evidence on record. As regards the functional dissimilarity and huge turnover and brand value is concerned, we find that this Tribunal in assessee's own case for A.Y. 2009-10 while considering the comparability of the assessee with Infosys BPO Ltd., has taken note of the possession of the brand value and intangibles which....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ble to the assessee. As regards the other three comparables challenged by the assessee and the T.P. adjustment proposed by the TPO, the brief facts are as under : 9.1. The assessee M/s. Hyundai Motor India Engineering P. Ltd., is engaged in providing/rendering R & D support service in respect of CAD and CAE, in designing automobile parts and in modeling and iterative simulation. It receives the basic design from its group company. It entered the following international transactions with its AEs. AE Nature of transaction Amount (in Rs.) Hyundai Autoever Corporation Purchase of computers 2,02,32,916 Hyundai Autoever Corporation Purchase of computer software 32,78,246 Hyundai Motor Company Provision of ITES 29,70,07,503 KIA Motor Corporation Provision of ITES 16,13,19,523 Hyundai Autoever Corporation Reimbursement of expenses paid 7,72,927 48,25,10,845 As per the audited statement of accounts, the financials of the tax-payer/assessee are as under: Nature of transaction Nature of International transaction MAM PLI Margin of tax payer Margin of comparables Pro....
X X X X Extracts X X X X
X X X X Extracts X X X X
....its objections before the DRP which was partly allowed. In consonance with the directions of the DRP, the final assessment order dated 17.10.2014 was passed against which, both the Assessee as well as the Revenue are in appeal before us. Let us now deal with the objections of the assessee on each of the three companies challenged by the assessee as not comparable before us". 13. Since the assessee is not agitating the comparability of this company before us, we reject the assessee's ground of appeal against this company. In the result, assessee's ground of appeal No.6, 6.1 and 6.2 are treated as partly allowed. 14. As regards Ground No.8, assessee is seeking inclusion of 11 companies in its ground of appeal, but at the time of hearing the learned Counsel for the assessee submitted that the assessee is serious about inclusion of item (1) and (2) i.e. Ace BPO Services Ltd and R Systems International Ltd. Further, he has also submitted that if Ground No.6 is allowed, then the ground become academic as held by the Tribunal in the case of Hyundai Motor India Engineering. 15. Having regard to the rival content ions and the decision of the Coordinate Bench in the case of Hyundai ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....os.1758 and 1936/Hyd/2014. As regards thecontention that interests can be charged only by the year end i.e. 31.3.2010, he placed reliance upon the decision of the Tribunal at Mumbai in the case of Tecnimont ICB Private Ltd in ITA No.487/Mum/2014. The learned DR however, supported the orders of the authorities below and relied upon the order of the DRP, it held that the TPO is given valid reasons to counter the objections of the assessee. 19. Having regard to the rival contentions, we find that in the case of Pegasystems Worldwide (Supra) wherein the Tribunal at para 17 held as under: "17. Ground No. 7 pertains to interest on outstanding receivables and 8 on incorrect computation of interest. Assessee raised the issue on separate adjustment made for receivables. TPO noticed that Assessee has receivables of Rs. 21,07,53,864/- at the end of the year. Assessee was asked to submit the details of raising the invoice and subsequent receipts. TPO proposed to charge interest at 12% on the outstanding receivables. While replying that assessee is a fully funded entity of the AE and the amounts outstanding are on services but not loan or advances given. It also does not have any wo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dinate Bench at Mumbai in the case of Lintas India Pvt. Ltd., in ITA No. 2024/Mum/2007 dt. 09-11-2012 and also Mastek Ltd., Vs. ACIT in ITA No. 3120/Ahd/2010 then referring to the provisions of the Act the explanation brought by amendment in 2012 Finance Act. It was submitted that even though retrospective, it does not cover Assessee's transaction as the word 'capital financing' used there particularly refers to loans or advances given for capital financing, whereas in Assessee's case, these are outstanding services rendered but not capital financing. The words are to be interpreted invoking the principles ejusdem generis and so the outstanding receivables cannot be equated to capital financing as amended by the provisions of the Act. It was further submitted that working capital adjustments are being made while analyzing the operational performance of the companies, therefore, outstanding amount gets adjusted in working capital adjustments and another separate addition is not required under the TP provisions. Thus, it was contended that the outstanding amounts are not to be considered for adjustment. 17.3. We have considered the issue and examined the rival contentions. I....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... AO/TPO to rework the profit margin of the assessee in accordance with the proviso to section 92C and this ground is accordingly treated as allowed for statistical purposes. 21. Ground No.19 being the computation of interests, we direct the AO/TPO to give consequential relief to the assessee, if any. 22. In the result, assessee's appeal is partly allowed. ITA No292/Hyd/2015 (Revenue's Appeal) 23. As regards Revenue's appeal, the Revenue is aggrieved by the directions of the DRP to delete M/s. E-Clerk Services Ltd from the final list of comparables and also in directing the AO to reduce the telecommunication charges and other expenditure, both from the export turnover as well as from the total turnover for computation of deduction u/s 10A of the Act. As regards the exclusion of M/s. E-Clerx Services Ltd, we find that the DRP has followed ITAT order wherein it was held that the said company has been regarded as KPO and not comparables to the ITES. The learned DR relied upon the order of the TPO, while the learned Counsel submitted that M/s. E-Clerx Services Ltd is functionally similar with the assessee and no segmental information is available. It is submitted that E-Cler....