AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2018 (3) TMI 1563
X X X X Extracts X X X X
X X X X Extracts X X X X
....tment of international transactions made by the 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... by ATI pertaining to a particular module based on the specifications provided by AEs. 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 offi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....comparables; namely, TCS E-Serve Ltd. and Accentia Technologies Ltd. are excluded then assessee's margin will be within the arm's length range; and then adjudication of other comparables will become purely academic. As an alternative, 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 furth....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ine the profit margin. As regards the brand value contribution by TCS E- Serve to Tata, he pointed out that it is merely at Rs. 4.2 crore and it cannot be said to be huge contribution. What is required to be seen is the pricing negotiation when the contract was entered into with the City Group by the TCS E-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 wir....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n 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 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 tha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....care sector from the software as SAAS Model which enables it for managing of healthcare documentation needs, receivable management needs, performance tracking and reporting etc. and it is also engaged in developing and design a cloud based posted application which are in the nature of software support services. All these functions 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 ente....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nsaction of ITES is separate which has also been benchmarked distinctly. In our considered opinion, e-Infochips Bangalore Ltd. having a pool of both software developments and ITES segments into the overall segment designated as 'Software development', cannot be considered as comparable on entity level with the international transaction 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es, it would mean that it is allowing its customers relatively longer period to pay their dues, which will result into higher interest cost and the resultant low net profit. Similarly, by carrying high trade payables, a company benefits from a relatively longer period available to it for paying back the dues to its suppliers, which reduces the interest cost 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he interest effect taking into account the time value of money that result from the opportunity costs of holding working capital. The interest effect in the comparable company's data are not completely eliminated albeit are adjusted to the company level of interest effect. The effect of receivables and payables in the working capital are there in service industries 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 Tribuna....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of Kusum Health Care, ITA No. 765/2016; and if already impact of receivables have been factored in the working capital adjustment and thereby on its pricing/profitability, vis-à-vis, the comparable, then no further adjustment is called for. The TPO will also see, whether assessee has any interest bearing borrowed funds and if it is not so then it cannot be reckoned 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/- ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ident from the fact that huge amount of Rs. 43.71 crores out of total expenses at Rs. 66.10 crore has been debited for outsourcing services. In support of his contention, he strongly relied upon the decision of this Tribunal in the case of BC Management Services Ltd. vs. DCIT (supra), wherein the Tribunal had observed and held as under:- "2. 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 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 w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to be seen and under this method such kind hair splitting distinction is not desirable. Thus, he strongly relied upon the order of the TPO. 34. We have heard the rival contentions and also perused the relevant findings given in the impugned order on the inclusion of E-clerx. On perusal of the financial statement as pointed out by the learned counsel, we find that E-clerx out of total expenses of 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....elivery of services for a period of six years with a guaranteed revenue of US $500 million. When such transaction was entered then it was a related party transaction. In support, he relied upon the decision of the Tribunal in the case of Saxo India Pvt. ltd., ITA No.6148/Del/2015, which has been held by the Hon'ble Delhi High Court vide order dated 28.09.2016 in ITA No.682/2016. 39. On the other hand, learned 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hnology Service Ltd. should be excluded on this count. ii) Infosys Ltd. 42. So far as the exclusion of Infosys Ltd. is concerned, the learned counsel submitted that it is a very huge company with a very high turnover and great brand name is associated with it which impacts the profitability of the said company. Now the issue whether Infosys Ltd. can be compared with Captive Service Pvt. Ltd. has now been well settled 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s. If these assets are to be compared with those of the assessee, it can be seen that it has 'nil' expenditure on R&D and no significant intangible asset. On this ground alone, various Benches of the Tribunal have held that Infosys Technologies Limited cannot be compared with small software companies, who are into contract software development services. A company like Infosys with mega operations and having significant assets and 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:....
X X X X Extracts X X X X
X X X X Extracts X X X X
....interest receivable is concerned, our directions given in the Assessment Year 2010-11 to the TPO will apply mutatis mutandis and in the light of the direction given therein, we remand this issue to the file of the TPO who shall examine these issues in line of the earlier year order after giving due and effective opportunity to the assessee. Accordingly, the grounds relating to transfer pricing system are partly allowed for statistical purposes. 45. Now we will come to the corporate tax disallowance as raised in 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....) of Explanation I to Section 115JB. The said claim has been disallowed by the Assessing Officer on the ground that, P&L account has to be prepared in accordance with Companies Act, wherein assessee had shown net profit of Rs. 19,74,67,550/- and only adjustment which is allowed or permissible is as per Explanation 1 to 115JB and Assessing Officer has no discretion to make any adjustment under MAT. The amount of Rs. 5,42,99,000/- paid to the landlord by withdrawing with the provision during the Year 2010-11 has not been found 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 cl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e accounting entry which is in effect the combination of following two accounting entries:- Provision for Contingencies Dr. INR 5,42,99,000/- To Profit & Loss Account INR 5,42,99,000/- And Profit & Loss Account Dr. 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. 5....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Serve Ltd. and inclusion of Infosys BPO Ltd. He further pointed out that even if Eclerx and TCS E-Serve Ltd. are removed the assessee's margin will fall within +/- range of 5%. In this year also as admitted by both the parties there is no change in the material facts either with regard to the functions carried out by the assessee in ITeS segment or in the functionality or other factors, vis-à-vis, the comparables during the Assessment Year 2012-13. Regarding E-clerx, the assessee's submission has been that it follows the outsourcing model of business 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 AGIL....