TaxTMI 
TaxTMI 
2017 (5) TMI 1501
X X X X Extracts X X X X
X X X X Extracts X X X X
....volved in all the appeals are common arising out of identical set of facts, therefore, same were heard together and are being disposed off by way of consolidated order. 2. We will first take up the assessee's appeal for the assessment year 2011-12, wherein following grounds have been raised: 1. That on the facts and in the circumstances of the case and in law, the order passed by the Ld. Assessing Officer ("AO") is bad in law. 2. That on facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO/ Ld. Dispute Resolution Panel ("DRP") erred in making an adjustment to the arm's length price ("ALP") of the Appellant's international transactions, relating to provision of finance/ IT-back office support services, with Associated Enterprises ("AEs") amounting to INR 20,744,853 by: 2.1. modifying the comparability analysis conducted in the transfer pricing documentation of the Appellant on inappropriate and inadequate grounds; 2.2. rejecting the applicability of functional filter applied in the search process by the Appellant; 2.3. rejecting Omega Healthcare Management Services Private Limited which were comparable to the Appellant, on ground of functional dissimilarity....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ons of provisions of Finance/ IT back office supports services, the assessee had selected 'transactional net margin method' (TNMM) as the most appropriate method by adopting the PLI as OP / TC. The margin of the assessee was worked out at 17.83%. For the purpose of bench marking its margin, assessee had selected seven comparable companies whose average PLI margin was arrived at 14.94% and accordingly, it was reported that the assessee's margins are at Arm's Length Price. During the course of transfer pricing proceedings, the assessee submitted two new comparable companies and out of resultant nine comparables, the TPO had rejected seven comparable companies and retained two comparable of the assessee namely; (i) Jindal Intellicom Limited; and (ii) E 4e Health Care Limited. Before analyzing the Arms Length Price, the learned TPO examined the various functions performed by the assessee which has been highlighted by him from pages 2 to 5 of his order, which for the sake of ready reference are reproduced hereunder: "The assessee's functions and services have been classified under two main heads accounts / financial supports services and I.T. support services. Under the finance suppor....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t by the assessee by holding that foreign exchange gain/loss cannot be reckoned as operating in nature. Accordingly, an upward adjustments of Rs. 2,36,21,261/- was suggested by him on the aforesaid transaction. 5. So far as the transaction of 'Purchase of fixed assets' is concerned, the Ld. TPO held that it is a separate class of transaction and therefore, has bearing on profit. He observe that, since assessee could not provide proper documentation, therefore, in absence of any supporting evidence or third party invoice, the Arms Length Price of the purchase of assets was taken by him as 'Nil', which resulted into an adjustment of Rs. 48,05127/-. 6. The learned TPO on further perusal of the transactions, noted that there was certain delay in receipt of payment from the AE and observed that estimate period of 30 days would be considered as normal period for inter-company sales and services and any delay beyond the aforesaid period should be bench marked. After treating it as a part of loan transaction, he calculated the interest rate of 11.69% after taking outbound loan on the basis of SBI base rate and accordingly, further adjustment of Rs. 5,25,938/- was made. 7. From stage of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....O and further added that E-clerx is involved in diverse nature of services and can be considered as KPO, whereas assessee is also not providing low-end ITeS services as it includes financial accounting, financial planning and analysis etc., which is nothing but high-end services and therefore, both E-clerx and assessee have similar functions and services. However as noted above, one of the member of the DRP has given dissenting note stating that the functional profile do not exhibit similar nature services because, the assessee is essentially providing back office support services while E-clerx operates in data analytic and process outsourcing services segment. E-clerx is one of the biggest first KPO Company, whereas the assessee operates as a captive service provider on cost plus model providing back office support services only. 10.2 Before us, the learned counsel for the assessee made elaborate submissions which can be summarised in following way:- a. E-clerx provides services though two business units; firstly, Financial services which includes consulting, business analysis and solution testing; and secondly, Sales & Marketing services which also includes web content managem....
X X X X Extracts X X X X
X X X X Extracts X X X X
....service provider companies. One of the main plank of the argument of the learned counsel before us to exclude E-clerx is that, it is very high-end service provider and one of the leading KPO service company in the country and this company is into diverse nature of services. We find that one of the dissenting member of the DRP has also highlighted the functional differences between the assessee and E-clerx and has given a categorical finding that E-clerx operate more as a data analytics and process outsourcing services segment, whereas the assessee is merely providing back office support services. 12. However without entering into the semantics of arguments as to what kind of functions constitutes low-end ITeS service provider or high-end ITeS or KPO service provider, we would like to confine our finding on FAR analysis. Because, at times when host of services are performed under ITeS, likes of assessees', there becomes very thin line distinction between functions performed by the low-end ITeS service provider and high-end ITeS service provider and it is quite difficult to analyse in such situations as to how much value additions are there in deliverables in rendering of such kind ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....parable on the ground that on standalone basis, ICRA is engaged in business processing and analytics which is part of ITeS, whereas the assessee has used consolidated functional. From the reading of the DRP's, it is seen that there is no particular observation made by the DRP for rejection of ICRA, albeit one of the DRP member who has given her dissenting note has given a very categorical finding that, this company does not exhibit functional similarity with the nature of services being provided by the assessee for the reason that ICRA is engaged in 'software development and consultancy', 'engineering services web development and hosting', apart from business analytics and business process outsourcing. Before us, the learned DR has been unable to rebut such an observation of the dissenting member of the DRP which is also corroborated from material on record. The learned counsel has also pointed out that apart from the fact that it is functional not comparable, even the segmental information with regard to ITeS and Software development and consultancy are not available. Hence, its margin cannot be benchmarked with that of the assessee. 14. After considering the rival submissions an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....E-Serve. d. Presence of brand- TCS E-serve being a subsidiary of TATA Consultancy Services Limited and is a part of the eminent TATA Group, which inherently has an element of huge brand value associated with it, which tends to influence the pricing policy and thereby directly impacting the margins earned by the company. Huge payment has been made by TCS E-Serve to TATA Consultancy for use of brand name, TATA. e. TCS E-Serve provides services pre-dominantly to Citi Group. f. Abnormal profit- The Ld. TPO stated super normal profit making companies cannot be rejected unless peculiar economic circumstances of such companies are pointed out. The assessee clearly demonstrated the abnormal circumstances, which led to super normal profits earned by TCS E-Serve. The company earned supernormal profits during the year i.e. 69.31% on cost. This fact is also substantiated in the table provided below: g. Abnormal fluctuations in profits: TCS e-serve's widely fluctuating growth in operating revenue, operating costs and margins. h. Size of the company: The employee cost base is more than 64 times that of the assessee. Further, its turnover is more than 67 times to that of the Appellant (....
X X X X Extracts X X X X
X X X X Extracts X X X X
....much intangibles and risks. Another important thing which has been pointed out by learned counsel is that, the operation of 'TCS E-Serve' broadly comprise of transaction processing and technical services including software testing, verification and validation for which no segmental bifurcation is available. In absence of such vital information of the margins of such varied segments it becomes quite difficult to put such company in the comparability basket so as to bench mark the correct profit margin. All the aforesaid factors have been held so in various decisions of this Tribunal in several cases as relied upon by the Ld. Counsel, including the decision of Amri Price India Private Limited (supra). Thus, in our opinion 'TCS E-Serve' cannot be held to be a good comparable for the purpose of bench marking the assessee's PLI and accordingly, we direct the Ld. AO/TPO to exclude TCS E-Serve from the comparability list. 19. In view of our favourable finding given with regard to the above three comparable, then as submitted by the Ld. Counsel, the adjudication on the other comparable will become purely academic, because the assessee's margin will fall within the tolerance range of + / -....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssue stands decided in favour of the assessee. However, as suggested by the learned DR, we direct the TPO to see, whether similar treatment of foreign exchange gain should be given in the case of comparable companies if these companies are also undertaking similar foreign exchange risk. 24. The next issue relates to, whether the TPO or Ld. DRP was justified in law and on facts by treating the transaction of import of fixed assets as 'Nil' and thereby resulting into enhancement of income of Rs. 48,05,127/-. The assessee has imported certain fixed assets from its AE which are mainly office equipments, fixtures and furniture, computers and peripheral and lease holds implements. Besides this, certain software were also imported. The assessee's case before the authorities below had been that these assets were imported by the assessee so as to enable it to carry on its business operations in India. The assessee's contention had been that, once for the bench marking of the international transaction the assessee has applied TNMM as most appropriate method by taking OP / TC as PLI, then depreciation on such an asset already stands considered as operating cost for rendering back office supp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of ALP determined for the transaction of purchase of capital asset cannot be taken at 'Nil' and therefore, at the threshold, such an action of the TPO as well as DRP cannot be upheld at all. Moreover, the plea of the assessee before us is that, it is a tax neutral transaction, which proposition finds support from the decision of the coordinate bench in the case of Ciena India Private Limited (Supra) wherein the Hon'ble Tribunal has observed and held as under: 15.2 "We have heard the rival submissions and perused the relevant material on record. It is noticed that the assessee purchased certain fixed assets from its AE with the declared value of Rs. 33.50 crore. In our considered opinion the assessee rightly reported Purchase of fixed assets with the transacted value as an international transaction, since the same is covered within the definition given in sub-section (1) of section 92B, which provides that "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or ..............'. Section 92(1) stipulates that: `Any income arisi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the transaction, which affects the total income. To illustrate, if a fixed asset is purchased by an enterprise from its AE for a sum of Rs. 100 and rate of depreciation on such asset is 10%, then the enterprise will charge depreciation amounting to Rs. 10 in its Profit and Loss account. If the ALP of such transaction is determined at Rs. 80, then the difference of Rs. 20 cannot be considered as income. Rather, the amount of depreciation will be restricted to Rs. 8 instead of Rs. 10, thereby increasing the total income by Rs. 2. When we advert to the facts of the extant case, it is found that the TPO has rightly held to the effect that it is the amount of depreciation on the purchase of such fixed assets, which will be considered for making addition and not the difference between the transacted value and the ALP determined at Nil. 15.5. Ordinarily an international transaction of purchase of fixed assets by an assessee engaged in a manufacturing or trading business is required to be determined on CUP method, which is usually the most appropriate method in such circumstances. The TNMM on entity level cannot be applied, because the transaction of purchase of fixed assets can have no....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tion cost to the assessee. In other words, the transactions of depreciation on one hand and the resultant revenue on the other, go hand in hand. In such a case, where the income is directly based on the costs incurred including depreciation, then these two transactions become 'closely linked' transactions, eligible for processing under the TP provisions on a combined basis. It is illogical to compute the ALP of the transaction of purchase of fixed assets and consequently reduce or nullify the amount of depreciation allowance de hors the consideration of international transaction of the revenue from AE, which is equal to depreciation as claimed with mark-up. Both the transactions of claim of depreciation allowance and revenue of depreciation with mark-up have to be seen jointly. The TPO in the present case has simply reduced the amount of deprecation allowance to Nil without simultaneously considering the revenue side of this transaction. If we consider these closely linked transactions of deduction for depreciation allowance and revenue due to depreciation in unison, the position which follows is that no further addition can be made on account of transfer pricing adjustment due to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....paid interest to any debtor. A perusal of profit and loss account show that interest and finance charges are only Rs. 73/-; and interest on corporate tax is Rs. 1,27,798/-. Apart from that there is no debt or loan with the assessee on which it has to pay any interest. Once it is an accepted fact that assessee does not have any interest bearing borrowed funds for extending any kind of loan to its AE, then it cannot be the reckoned that assessee has given any benefit to the AE by blocking its interest bearing funds to the AE by extending the credit period. This has been held so by this tribunal in the case of Bechtel India Private Limited (Supra). Moreover as pointed out by the learned counsel, the assessee has also given similar credit period to the third parties which are extending up to 181 days. If a similar credit period is given to the AE as given to third parties, then under the arms length scenario and looking into the similar conditions prevailing between controlled transaction and comparable uncontrolled transaction, then there cannot be any adjustment, because in a situation like this, there is a direct CUP to analyse such transaction. Accordingly, the transfer pricing adj....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... following submissions qua this comparable:- a. Functionally different: Accentia renders KPO services in the healthcare sector, by way of software as a service "SaaS" model. The software helps in managing all the healthcare documentation needs, receivables management needs, performance tracking and reporting. It is also engaged in developing and designing a cloud based hosted application, hardware and bandwidth infrastructure, which are in the nature of software and software support services. Accentia is engaged in development and sale of products and provision of services. However, segmental break-up between software product division and medical transcription division are not available. b. Presence of IPR - Accentia possesses goodwill / brand/ IPRs amounting to 49.27% of the Net Fixed Assets, which tends to influence the pricing policy and thereby directly impacting the margins earned by Accentia. c. During FY 2010-11, Accentia acquired strategic Tangent Corporation which was a software development company having expertise in development of software related to EMR and SaaS. d. Abnormal circumstances: Because of acquisitions between FYs 2007 and 2011, the revenues of Accent....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... and in the circumstances of the case and in law, the Ld. AO/ Ld. TPO/ Ld. DRP erred in application of Transactional Net Margin Method ("TNMM") by: 3.1. rejecting / modifying the economic analysis conducted in the transfer pricing documentation by the appellant, including the comparable companies selected for arm's length price determination, during the course of assessment proceedings; 3.2. applying inappropriate quantitative filters and instead applying new filters, which resulted in arriving at a cherrypicked result; 3.3. accepting companies that were functionally not comparable to the appellant in terms of functions, assets and risk profile; 3.4. computing erroneous margins of the companies selected for arm's length price determination; 3.5. confirming the selection of current year (i.e. financial year 2011-12) data for arm's length price determination; and 3.6. not treating foreign exchange gain/ loss as operating in nature, while computing the operating margin; 4. That on the facts and in the circumstances of the case and in law, the Ld. AO/Ld. TPO/ Ld. DRP erred in making a notional adjustment of interest amounting to INR 649,897 on outstanding receivab....
X X X X Extracts X X X X
X X X X Extracts X X X X
....3. Caliber Point Business Solutions Limited. 4. Eclerx Services Ltd. 5. Excel Infoways Ltd. 6. Informed Technologies India Limited. 7. Infosys BPO Ltd. 8. Jindal Intellicom Ltd. 9. TCS E-Serve Ltd. Out of theses comparable before us, the assessee is only challenging, E-clerx and TCS E-Serve Limited. Since both the parties are not disputing that the factors relating to comparability analysis in case of E-clerx and TCS E-Serve vis-a-vis the assessee are not different from the earlier year, therefore, our finding given regarding these two comparable as given in foregoing paras of earlier year appeal will apply mutatis mutandis. Thus, in view of finding given therein, we direct the TPO to exclude these two comparables from the comparability analysis and accordingly work out the arm's length price. Other comparable companies as challenged in grounds of appeal are therefore, not adjudicated. 40. The next issue relates to transfer pricing adjustment on account of imputing the interest on outstanding receivables. Here in this year also, the fact remains the same that assessee is a debt free and it has neither received any interest from any creditors nor paid interest to debto....