TaxTMI 
TaxTMI 
2018 (3) TMI 1563
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....he Transfer Pricing Officer/Assessing Officer on following provision of services:- (i) On account of IT enable services (ITeS segment)-Rs.16,67,89,267/-; (ii) On account Information Technology services (IT segment)-Rs. 2,62,12,557/-; and (iii) On account of receivables- Rs. 48,33,838/- 3. The brief facts and background of the case are that the assessee-company is a 100% subsidiary of 'Agilent Technologies International Europe, BV', which in turn is a wholly subsidiary of 'Agilent, Technologies, Inc. USA'. The assessee- company was set up under STPI scheme of the Government of India and had commenced its operation in the year 2002. It is mainly engaged in the providing software development services (IT) and information technology enabled services (ITeS) to its associated enterprises (AEs). In the transfer pricing study report the assessee has highlighted following broad services under both the segments:- IT-enabled division: The services provided by this division include the following:- Finance back office support: These services involve internal financial transaction processing including processing for sales accounting and vendors payables. IT-support and network management:....
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....s. The ultimate responsibility for undertaking the coding and documentation function for the complete software product rests with its AEs." And in the ITeS, the functions performed by the assessee was as under:- 5.4 Functions performed by the taxpayer w.r.t. the ITES Segment are:- Strategic management functions: Agilent US determines the overall strategy for the group. ATI is responsible for only day to day management activities. Corporate Services: ATI is responsible for financial management and routine administration activities. However, for functions like personnel management and controllership, both Agilent US and ATI are involved. Marketing and business development: Being a captive unit for its AEs, ATI does not undertake any marketing or business development functions. It only renders services to its group companies as per specifications provided by them. Further, services of ATI are not required to be sold to end customers, Hence, ATI is an in-house service provider and the services are purely in the nature of routine back office work. Conceptualization of services: Agilent US is responsible for conceptualization of services to be rendered by ATI. Execut....
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....native, he also submitted that TCS EServe International Ltd. and Infosys BPO Ltd., should also be excluded and pleaded for exclusion of one comparable company, i.e., R Systems International Ltd. Regarding the exclusion of aforesaid comparables and inclusion of R Systems International Ltd., learned counsel submitted that, all these comparables had come up for consideration before this Tribunal on numerous occasions in various cases, wherein these companies had been held to be incomparable with the companies which are captive services provider and providing simply IT enabled services. Now we shall take up the two comparables first under the ITeS segment, which assessee has pleaded for exclusion. ITeS Segment:- i) TCS E-Serve Ltd. 8. Learned counsel submitted that on FAR analysis, this company cannot be held to be comparable with the assessee due to incomparable scale of operations, payment for brand equity and presence of intangibles, etc. It was further pointed out that this company is engaged in services like, software testing, verification and validation and data centre management services which fall under software development services which are different from low end and low r....
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....Serve Ltd, because TCS E Serve Ltd. was mainly serving to City Group which is its largest single customer, and in such a situation brand Tata is not effecting the revenue or profitability. TCS E-Serve Ltd. is not owning any intangible in the form of any own software developed by it. Otherwise, the entire function of TCS E-Serve Ltd. is purely ITeS service only; and hence, same cannot be held to be incomparable. 10. We have heard the rival submissions and also perused the relevant findings given in the impugned order for exclusion of TCS E-Serve Ltd. As discussed above, the assessee is a captive service provider which is providing back office support like, internal transaction processing including processing for sales, accounting and vendor payables; and IT support and network management like providing knowledge management for engineer designs and network management for the wireless network solution of Agilent US. The TCS EServe is too engaged in providing IT services primarily to City Group entities globally. Apart from that, TCS E- Serve provides technical services involving software testing, verification and validation of software at the time of implementation and data managemen....
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....ments 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 Amriprise 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. AP/TPO to exclude TCS E-Serve from the comparability list." 11. Apart from that in other decisions relied upon by the learned counsel, including that Hon'ble Delhi High Court in Actis Global Service Pvt. Ltd. vs. Pr. CIT in ITA. 94/2017, we find that on similar point of distinction, TCS E-Serve has held to be incomparable. Thus, we hold that TCS E-Serve cannot be held to be comparable with that of the assessee for bench marking the profit margin. ii) Accentia Technology Pvt. Ltd. 12. One of the main argument raised by the assessee before the TPO as well as before us is that, there was an amalgamation of 'Asscent Infoserve Pvt. Ltd. with Accentia Technology Pvt. Ltd. during the financial year 2010-11....
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....ns definitely cannot be held to be similar with those of the functions carried out of back office support services by the assessee. In any case, on the ground of merger by way of amalgamation during the year of a company with Accentia, which factor has been the basis for exclusion by this Tribunal in series of judgment as referred by the ld. Counsel, we hold that this factor alone calls for exclusion for the purpose of comparability analysis. Thus, we direct the exclusion of Accentia Technologies Ltd. from the comparability list. 16. Since the learned counsel has submitted that, if TCS E- Serve Ltd. And Accentia Technology Ltd. are excluded then average margin of the comparables would come down to 21.15%, whereas assessee's margin 15.95% and accordingly it will fall within the range of +/- 5%, which comes to 21.74%. In view of this factor, we are not entering into the adjudication of other comparable companies as challenged by the assessee before us, because it will be purely academic exercise. Accordingly, under the ITeS segment, we direct the TPO to exclude these two comparables and if the profit margins are within the arm's length range, vis-à-vis, the comparable, then n....
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....of 'Software development' of the assessee. We, therefore, order for the exclusion of this company from the list of comparables." 19. Further reliance was also placed on the following judgments:- (i) Pegasystems worldwide India Pvt. ltd. (ITA No.1758/Hyd/2014). (ii) Intoto Software India Pvt. Ltd. (1921/Hyd/2014 & 25/Hyd/2015). (iii) Allscripts India Pvt. Ltd. (ITA No.771/Ahd/2014) Where in these cases, on this ground alone this company was directed to be excluded. 20. On the other hand, learned DR strongly relied upon the order of the TPO and pointed out that E-Infochip Bangalore Ltd. has only income from software services. Thus, it cannot be held that on this ground this company should be excluded. 21. We have heard the rival submissions and also perused the relevant findings given in the impugned order. From the perusal of the director's report of E-Infochips Bangalore Ltd., it has seen that it has been reported that this company is primarily engaged in software development and IT enabled services which is considered as only reportable segment business as per accounting standard AS-17. This declaration itself goes to show that this company does not have separate segments f....
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....and increases profits. In order to neutralize the differences on account of carrying high or low inventory, trade payables and trade receivables, as the case may be, it becomes eminent to allow working capital adjustment so as to bring the case of the assessee at par with the other functionally comparable entities. We, therefore, agree in principle with the grant of working capital adjustment." 23. Similarly in the case of Mercer Consulting (India) Pvt. Ltd., the Tribunal has again rejected the revenue's contention that working capital adjustment can only be given in the case of manufactures and traders and not to the service providers. The Tribunal held that what is true for other categories of business, the same is also for the service provider. Likewise, similar view has been held in United Health Care Information Services Pvt. Ltd., ITA No.612/Del/2012, wherein it has been held as under:- "13.2. Having heard the rival submissions and perused the relevant material on record, it is manifest that the working capital adjustment is required with reference to stock, trade receivable and trade payables. By carrying the high trade receivables, a company allows its customers a relativ....
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....also. Now there are various guidelines and factors have been laid down to work out working capital adjustment and accordingly, we direct the assessee to provide the detail working of the capital adjustment to the TPO and he is directed to verify the correctness of the amount and working capital adjustment as given by the assessee and allow the same in accordance with settled principles. Thus, with this direction, this issue is treated as allowed for statistical purposes. 26. Lastly, coming to the issue of adjustment on account of receivables, at the outset learned counsel submitted that working capital adjustment itself takes into account the impact of outstanding receivables on the profitability and accordingly, no separate adjustment is warranted on account of outstanding receivables. He submitted that Delhi Tribunal in the case of Kusum Healthcare Pvt. Ltd. vs. ACIT, ITA No.6814/Del/2014 held that if the impact of credit period has been duly factored in working capital adjustment, while determining the ALP, then no separate or further adjustment of interest on the receivables, was warranted in the hands of the tested party. He submitted that the said rule of the Tribunal has be....
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.... that assessee has given any benefit to the AE by blocking its interest bearing funds to the AE by extending the credit period. Accordingly, the TPO will decide the issue in accordance with law in the light of the aforesaid decision. 28. So far as the grounds relating to chargeability of interest under various sections as raised in the grounds of appeal same admitted have been by the Ld. Counsel to be consequential, hence no adjudication is required. Accordingly, appeal of the assessee is treated as partly allowed for statistical purposes. 29. Now we shall take up the appeal for the Assessment Year 2011-12, wherein the assessee is aggrieved by the transfer pricing adjustment on the following transactions:- (i) On account of ITeS: INR 24,02,79,893/- (ii) On account of IT: INR 2,35,71,118/- (iii) On account of Receivables: INR 19,35,134/- Besides this, assessee has also taken following grounds for corporate tax disallowance:- 8. On the facts and in the circumstances of the case and in law, the Ld. AO has grossly erred in restricting the deduction under section 10A of the Act at INR 11,41,61,675 as against INR 11,64,21,113 and making a disallowance of INR 3,28....
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....guments 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 of host of services. At the outset, on a perusal of the Financials and annual report of E-clerx for the relevant financial year as pointed out to us during the course of the hearing, we find that the E-clerx has outsourced most of its services to outsiders which is evident from the fact that the expenses under the head 'contract for the services' is more than Rs. 43.71 Crores during the year out of total expenses debited to profit & loss account of Rs. 91.29 Crores. The major operations appears to be based on outsource model, which is evident from the quantum of expenditure and notes to the financial account (the copy of which is appearin....
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....Rs. 66.01 crores has spent Rs. 43.71 crore for outsourcing its contract for services, whereas in the case of the assessee, the entire expenditure has been done through its own human resources. The major operation of this company seems to be based on outsourcing model and in an outsourcing model the assets deployed in the form of human resources, infrastructure and other intangibles differs from an entity which operates from its own human resources. In the case of the assessee, the entire back of its support have been provided by the assessee, and therefore, following the judicial precedents in the case of B.C. Management Services (supra), we hold that E-clerx should not be included for the comparability and analysis and accordingly same is directed to be excluded. TCS E-Serve Limited 35. With regard to the TCS E-Serve Ltd., the TPO selected this comparable after rejecting the assessee's contention regarding functional incomparability, incomparable scale of operation, payment of brand equity and presence of intangibles. Apart from that it was submitted that this company is also providing services like software testing, verification and validation of the software and data managemen....
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....CIT-DR, relied upon the order of the DRP and TPO. 40. We have heard the rival submissions and also perused the relevant findings given in the impugned order as well as the material placed on record before us. Wipro Ltd., had acquired a company known as 'Citi Technology Services Ltd.,' in the year 2009 as a part of overall business deal, which was carrying out the services for Citi Group, which then were related party transactions. Wipro Ltd. signed a Master Service Agreement with the Citi Group for the delivery of same service for a period of six years with guaranteed revenue of US $500 million. Wipro Technology Services Ltd., has been providing services to Citi Group out of India as a part of said agreement and thereby it falls within the deeming ambit of Section 92B (2), whereby it has to be treated as deemed AE as the service agreement earlier entered was between the related party and same terms and agreement is continuing, hence has to be reckoned in the category of related party transactions. Clause (2) of Section 92B envisages that, if a transaction entered into by an enterprise with a person other than AE, shall for the purpose of subsection (1), be deemed to be an internat....
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.... by the Hon'ble Delhi High Court in the case of CIT vs. Agnity India Technologies Pvt. Ltd. in ITA No.1204/2011. Learned counsel has also relied upon the decision of this Tribunal in the case of Cadence Design System (India) Pvt. Ltd. vs. DCIT, ITA No.2074/Del/2014, wherein this comparable company has been dealt with in the following manner: "7. The assessee's main contention for exclusion of Infosys Technologies Limited had been that firstly, its services are incomparable with the assessee because Infosys is into technical consultancy design, development, re-engineering maintenance, system integration, package evaluation and implementation and infrastructure management services; secondly, it has huge R&D work for its products, which are more than Rs. 267 crores, whereas in the case of the assessee it is Nil; thirdly, Infosys has huge intangibles and brand value is also huge whereas in the case of the assessee it is nil; and lastly, Infosys is into large scale of operations which is evident from the fact that during the year it had turnover of Rs. 20,265 crores, whereas in the case of the assessee, it is only 248.53 crores. Thus, the company having such a huge turnover canno....
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....brand value and full-fledged risk taking entrepreneur developing and selling proprietary products cannot be held to be comparable with the captive service and contract software development companies as the comparability analysis fails on all the factors of FAR. The Hon'ble Delhi High Court in the case of CIT vs. Agnity India technologies Pvt. Ltd. (supra) made a comparative chart while dealing with similar comparative analysis, which for sake of ready reference is reproduced hereunder:- Infosys Technologies Ltd. Assessee Basic Particular Risk Profile: Operate as full-fledged risk taking entrepreneurs Operate at minimal risks as the 100 percent services are provided to AEs Nature of services: Diversified-consulting, application design, development, re-engineering and maintenance system integration, package evaluation and implementation and business process management, etc. Contract software development services Turnover: 20,264 crores 209.83 crores Ownership branded/proprietary products: Develops/owns proprietary products like Finacle, Infosys Actice Desk, Infosys iProwe, Infosys m Connect. Also the company derives s....
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....grounds no.8 and 9. As regards ground no. 8, the only grievance seems to be that the Assessing Officer has erred in excluding the expenditure incurred on loss of foreign exchange fluctuation of Rs. 38,64,205/- and travel expenses in foreign currency of Rs. 3,93,22,494/- from the total turnover. Here, in this case, the DRP after referring to the various decisions including that of Hon'ble Delhi High Court in the case of CIT vs. Genpact India had given the following direction:- "Placing reliance on the jurisdictional High Court decisions in CIT V Genpact India and drawing guidance from Supreme Court decisions in CIT Vs. Lakshmi Machine Works (2007) 290 ITR 667 and CIT Vs. Catapharma (India) (P) Ltd (2007) 292 ITR 641 wherein it has been held that excise duty and sales tax should not be included in the total turnover as the same are not includible in the export turnover, this objection is allowed. AO is directed to reduce expenditure reduced from the export turnover from the Total Turnover for computing deduction u/s 10A. While re-computing the deduction under section 10A of the Act, the AO has erroneously taken the amount of deduction at Rs. 11,41,61,675 instead of Rs. 11,41,63,569....
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....nd under clause (i) of Explanation I because such amount is not credited to the P&L account. It has been confirmed by the DRP Also. 48. After considering the rival submissions made by the parties before us and on perusal of the relevant findings given in the impugned orders as well as material referred to during the course of hearing, we find that the assessee had created the provision of contingency in the Assessment Year 2009-10 amounting to Rs. 6,80,00,000/- on account of anticipation of early vacation of premises. The said provision for contingency was added back while computing the book profit for the Assessment Year 2009-10 which was in accordance with clause (c) of Explanation 1 to Section 115JB. In the Assessment Year 2010-11, an amount of Rs. 1,37,01,000/- out of total sum was reversed to the P&L account, leaving an amount of Rs. 5,42,99,000/-. In the impugned Assessment Year 2011-12, the assessee actually paid the compensation amounting to Rs. 5,42,99,000/- to the landlord out of provisions for contingencies for early vacation of office premises. Since the assessee had added back the amount of compensation while computing the book profit for A.Y. 2009-10, it was claimed ....
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....; INR 5,42,99,000/- To Bank A/c / Landlords A/c I NR 5,42,99,000/- Thus, he submitted that same cannot be added back for the purpose of computing the book profit. 51. On the other hand, learned DR, submitted that net profit shown in the book profit account cannot be changed and book profit needs to be taxed under the provision of law and there is no question of law any tinkering P&L account. 52. From the facts as narrated above, it is evidently clear that provision for contingency which was made in the Assessment Year 2009-10 was added back for the purpose of computing the book profit and calculation of MAT. A part of the sum was reversed which was allowed for the purpose of MAT computation by the assessee and also accepted by the Assessing Officer. From the accounting entries as explained by the learned counsel show that a composite accounting entry has been incorporated above. In substance, there is a withdrawal for provision of contingenci....
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....and out Rs. 128.38 crore an outsourcing contract for services has been 66.08 crore, whereas in the case of the assessee it has been Nil. We have already discussed this issue in detail in the earlier years, wherein following the various Tribunal decisions we have held that this factor alone is sufficient for exclusion of the comparable from the assessee. Accordingly, we hold that E-clerx should be excluded. 55. As regards TCS E-Serve Ltd., the following figures have been submitted by the assessee to show that there is a difference in the scale of operations, presence of intangible and brand expenditure:- PARTICULARS AGILENT INTERNATIONAL TCS E-SERVE FY 2011-12/AY 2012-13 FY 2011-12/AY 2012-13 TURNOVER INR 243.12 crores INR 1733.34 crores EMPLOYEE COST INR 138.93 crores INR 697.91 crores INTANGIBLES NIL INR 2.83 crores BRAND EXPENDITU NIL INR 3.67 crores 56. Since the comparability factors and other issues remains the same in this year also with regard to the TCS EServe Ltd., therefore, following the precedents of the earlier years as above, we hold that TCS E-Serve Ltd., cannot be taken for the purpose of comparability analysis. Accordingly, TPO is directe....