TaxTMI 
TaxTMI 
2017 (5) TMI 1501
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....s given by the DRP. Since the issues involved 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 w....
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....f fixed assets 2,86,67,478/- 3. Reimbursement of expenses to AE 1,64,07322/- 3. For bench marking its international transactions 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 f....
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.... Services Pvt. Ltd. 9.77 4. Accentia Technology Limited 29.18 5. Acropetal Tech Ltd. (seg.) 14.36 6. Eclerx Service Ltd. 56.82 7. ICRA techno analytics Ltd. 25.24 8. TCS e-Serve Ltd. 69.31 Average 29.53% The Ld. TPO has also altered the PLI of assessee at 16.80%, instead of 17.83 % arrived at 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 th....
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....ely low in nature; c. Data analytics and process outsourcing services provided by E-clerx are part of its ITeS, hence comparable to the assessee; d. Outsourcing of work is not the criteria to reject a company as argued by the assessee; e. No substantial presence of intangibles; f. The assessee has not demonstrated effect of the extraordinary events in case of E-clerx. 10.1 The DRP has upheld the action of the TPO 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 operat....
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....The assessee is mainly providing back office support services to its AEs relating to Accounts/ Financial support services; and IT support services. Intra these heads of services, the assessee company is performing host of functions which have been illustrated by the TPO in his order from pages 2 to 5 and also finds mention in assessee's T.P. Study Report. The assessee has classified itself as the company providing low-end ITeS services and has distinguished itself from high end ITeS services or KPO 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....
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.... counsel has relied upon catena of decisions of this Tribunal and also High Courts, wherein E-clerx has been held to be incomparable with the companies providing purely back office support services. In view of aforesaid cumulative factors, we hold that E-clerx cannot be held to be a good comparable for bench marking the assessee's margin to arrive at ALP and accordingly, we direct the AO/TPO to remove this comparable. (ii) ICRA Techno Analytics Limited:- 13. The learned TPO has taken this comparable 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 ....
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....tware testing, verification and validation of software at the time of implementation and data centre management activities which are clearly not comparable to the ITeS. However, segmental bifurcation between transaction processing and technical services is not available in the public domain. c. TCS E-Serve, being earlier entrants in the industry, has developed domain expertise, process excellence; ability to leverage technology etc., whereas, this is the first year of operation, of the assessee, hence cannot be compared to the TCS 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....
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....S E-Serve to 'TCS Limited' for the use of the brand as a "royalty". This fact itself shows the effect of brand value in the pricing mechanism. On a further analysis it is seen that the employee cost base is more than 64 times than the assessee and even the turnover is also more than 67 times as compared to the assessee. This only goes to suggest that assets employed by 'TCS E-Serve" alongwith huge intangibles in the form of brand value definitely has a huge effect in PLI and vitiates the comparability under FAR analysis with a company like assessee which is a captive service provider without 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 c....
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.... transaction in which the foreign exchange risk is borne by the tested party then foreign exchange gains or losses should be consistently accounted for and it has to be reckoned as part of operating income or loss. Now when this issue stands decided in favour of the assessee by the decision of Hon'ble Delhi High Court in the case of Amri Price India Private Limited (Supra), therefore without going into further analysis, we respectively following the ratio, hold that the foreign exchange gain has to be treated as part of operating income and therefore, the PLI has to be computed accordingly. Thus this issue 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 ....
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....termine the Arms Length Price after carrying out comparability analysis from the uncontrolled comparable transactions by adopting any of the prescribed method. If the assessee has claimed that it has purchased the assets on cost to cost basis and there is no mark up, then it was all the more incumbent upon the TPO to examine the transaction, as to whether under a third party situation what would be he ALP of such transaction. The ALP cannot be determined 'Nil' unless it is brought on record by the TPO that in the third party situation, the cost to such an asset would also be nil. Hence in our opinion, the value 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 th....
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....ising from an international transaction shall be computed having regard to the arm's length price. It does not say that the total income is to be computed in accordance with the ALP. It is rightly so because the international transactions which have no direct bearing on the total income, cannot give rise to addition on account of difference between their transacted value and ALP. Since the transaction of purchase of fixed assets is a capital transaction, this, in itself, does not affect the total income of the assessee. It is only the off-shoot of such transaction in the capital field, being depreciation allowance on such ALP of 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 fac....
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.... on fixed assets, including those purchased from AE, is also compensated with the same mark-up. Thus we can say that depreciation allowance and remuneration to the assessee on such depreciation are inseparable transactions. The income in the shape of remuneration to this extent directly depends upon the amount of deprecation allowance. When the assessee is getting mark-up of 13%, the amount of deprecation at Rs. 10 in our above hypothetical example will fetch remuneration of Rs. 11.30. If the amount of depreciation is reduced to Nil, the amount of income to that extent will also be Nil, because the mark-up can be applied only if there is depreciation 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 con....
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....es 145 and 146 of the paper book, which is a copy of profit and loss account and statement of interest in financial charges. Further, he strongly relied upon the decision of the Tribunal in the case of Bechtel India Private Limited, ITA No. 1478 / Del / 2015 and also pointed out that, this decision has now been affirmed by the Hon'ble Delhi Court. On the other hand learned DR relied upon the orders or the TPO as well as DRP. 29. After considering the rival submissions and on perusal of the relevant material placed on record, we find that first of all, the assessee is a debt free company as it has neither received any interest from any creditors nor 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 extendin....
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....mains for our adjudication in the departmental appeal is the DRP's direction to exclude, one comparable company, M/s Accentia Technologies Private Limited. The TPO has included this company on the ground that it is functionally similar and passes all the filters adopted by him. On the other hand, the DRP has excluded the said comparable on the ground that there were exceptional circumstances effecting the profit during the year. 34. The learned DR on functional comparability submitted that, the TPO has given his elaborate finding how it is functionally comparable to the assessee and also drew our attention to various observation of ld. TPO. On the other hand, learned counsel made 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. Ac....
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....r the assessment year 2012-13. In the grounds of appeal, the assessee has raised following grounds: 1. That on the facts and in the circumstances of the case and in law, the order passed under section 143 (3) r.w.s. 144C of the Act by the Learned Assessing Officer ("Td. AO") is erroneous and bad in law as well as in facts. 2. That on the facts and in the 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 25,972,178. 3. That on the facts 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 ....
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....wo comparables are removed, then other comparables which has been included by the TPO and also upheld by the DRP will become purely academic. So far as these two comparables are concerned, he submitted that the facts are identical and there is no material change in the comparability analysis of companies' vis-à-vis the assessee, therefore, any finding given in the assessment year 2011-12 would be squarely applicable in this year also. This fact has also not been controverted by the learned CIT DR that facts and material for carrying out comparability analysis are the same. 39. After considering the aforesaid submissions and on perusal of the impugned orders, we find that the comparable companies which have been finalized from the stage of the DRP are as under: 1. Accentia Technology Ltd. 2. Acropetal Technologies Ltd. 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 ....