AI Drafter 
TaxTMI 
TaxTMI 
2018 (4) TMI 82
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....1/2012 declaring a total income of Rs. 4,75,85,020/-. The assessee-company also reported the following international transactions with its Associated Enterprises (AE) in 93CE report: Amount Software Development, Software Solutions, Back office Operations & IT Consulting 39,18,46,257/- Reimbursement of Expenses 5,13,14,609/- 4. The assessee-company sought to justify the consideration received for the international transactions entered with its AE to be at arm's length price [ALP]. The assessee-company had submitted transfer pricing study report adopting TNMM as the most appropriate method for purposes of bench marking the international transactions. The assessee-company claimed that the same was comparable with other comparables. The international transactions have been classified into two segments in the TP study report .i.e. software segment and ITES segment. The profit margin of the assessee-company in respect of software development segment is 17.45% and the same was found to be at arm's length by the TPO. Therefore, we are not concerned with the software segment. 5. In respect of ITES segment, profit margin of the assessee-company was computed ....
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.... 11.75 2 Universal Print Systems Ltd.(Seg) (BPO) 6,17,67,000 3,87,49,000 52.46 3 Informed Technologies India Ltd. 1,96,36,431 1,82,45,770 6.08 4 Infosys B P 0 Ltd. 1316,75,11,974 962,91,06,964 36.30 5 Jindal Intellicom Ltd. 30,27,51,875 30,29,02,990 -0.05 6 Microgenetic Systems Ltd. 1,29,93,217 1,08,63,390 19.61 7 TCSE-Serve Ltd. 15,78,44,000 9,64,28,000 63.69 8 B N R Udyog Ltd.(Seg)(Medical Transcription) 1,47,04,000 97,87,000 50.61 9 Excel Infoways Ltd.(Seg)(IT/BVPO) 790,96,95,000 559,06,04,000 29.79 10 e4e Healthcare Services Pvt Limited 89,50,04,209 74,59,23,078 19.85 Average PLI 28.11% 7.2 The TPO computed average profit margin of the said comparable in respect of ITES segment at 28.11% after giving working capital adjustment of 1.10%, adjusted arithmetical mean of comparable was determined at 27.01%. On the said basis, the TPO computed TP adjustment as follows; Arm's Length Mean Margin on cost 28.11% Less: Working Capital Adjustment 1.10% (As per Annex. F) Adjusted margin ....
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....f Income Tax, Transfer Pricing - 2 (2)(2), Bangalore (hereinafter referred to as 'the learned TPO') for computation of arm's length price ('ALP'). 4. That on the fact of the case and in law. the learned TPO / Hon'ble DRP has erred by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income Tax Rules, 1962 ('the Rules'), and conducting a fresh economic analysis for the determination of the ALP of the Appellant's international transaction pertaining to provision of IT enabled services by the Appellant and holding that the said international transaction is not at an arm's length without sharing the detailed accept reject matrix for selection or rejection of companies evaluated by him. 5. That on the facts of the case and in law, the learned TPO / Hon'ble DRP has erred in rejecting the Appellant's claim to use multiple year data for computing the arm's length price and. instead, has adhered to the use of single year updated data to conclude the ALP of the international transaction which was not available to the Appellant at the time of undertaking transfer ....
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....ware acquired and capitalized by the assessee, under section 40(a)(ia) of the Act on the basis that TDS has not been done thereon. 13.1 That, on the facts and in the circumstances of the case and in law, the learned AO/ Hon'ble DRP have erred, in not appreciating that depreciation, being a statutory allowance under section 32 of the Act, cannot be disallowed under section 40(a)(ia) of the Act, and, in ignoring the judicial precedents relied upon by the Appellant in this regard. 13.1.1 That, on the facts and in the circumstances of the case and in law, the learned AO/ Hon'ble DRP have erred in not following the binding ruling of the jurisdictional Bangalore bench of the Tribunal in the case of Kawasaki Microelectronics vs. DDIT (155 ITD 402) [Jurisdictional Bangalore ITAT] (2015). 13.1.2 That, on the facts and in the circumstances of the case and in law, the learned AO/ Hon'ble DRP, while placing reliance on the decision of the Mumbai ITAT in the case of M/s V Kay Translines (P) Ltd vs ITO (2011-TOIL-318-ITAT-Mumbai), have ignored the fact that the Mumbai ITAT itself in a subsequent decision in the case of Sonic Biochem Extractions (P.) Ltd. (59 SOT 4)[2013] has....
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....nd TCS-e-Serve Limited as comparable companies applying incorrect comparability criteria." 18. "The learned AO / TPO and DRP erred in accepting e4e Healthcare Business Services Private Limited as comparable company which was chosen as comparable in transfer pricing study but upon availability of more details in public domain, this company is found to be not comparable and should be excluded from the final set of comparable companies." 19. "The learned AO / TPO and DRP erred in rejecting R Systems International Limited and Caliber Point Business Solutions Limited as comparable companies." 20. The Hon'ble DRP erred in rejecting Informed Technologies Limited as comparable company." 10. Ground Nos.2 to 12 relates to the criteria to be adopted for selection of comparables. Vide these grounds of appeal, the assesseecompany is seeking exclusion of the following comparables. a) Infosys BPO Limited b) TCS e-Serve Limited c) Universal Print Systems Limited d) BNR Udyog Limited (Medical Transcription segment) e) Excel Infoways Limited and inclusion of the following comparables. i) R Systems International Limited ii) Caliber Point Business Solutions Limi....
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....erated the same submissions made before the TPO and contended before us that it is functionally not comparable as it is : a) Functionally not comparable - wide array of services - sourcing and procurement, customer service, finance and accounting, knowledge services, human resources in various verticals such as banking and capital markets, communication media and entertainment, manufacturing emerging market solutions, insurance and healthcare, retail, energy, utilities and resource, automotive and aerospace, transportation and services. b) Operates as full-fledged risk bearing entrepreneur whereas Appellant is risk insulated c) Big Brand Value - The Company's spend on brand building is almost equivalent to 22% of the Appellant's income from rendering of IT enabled services and therefore is not comparable to the Appellant. d) Exceptional year operation - Acquired 100 percent voting interest in Portland Group Pty. Limited. Acquisition of Portland Group Pty. e) Significantly Large scale of operations - INR 1312.41 crores turnover vis-à-vis INR 30.39 crores of the Appellant in ITeS segment (43 times of Appellant's revenue). The TPO should apply a corresponding upp....
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....i. Further it is stated at page no. 471 that during the year under consideration this company had acquired Australia-based Portland Group Pty Ltd. From the perusal of the functional profile of the company it is clear that it is into knowledge process outsourcing which is high value added services which means high end Business Process Outsourcing. Thus the Hon'ble Delhi High Court in case of Rampgreen Solutions (P.) Ltd. Vs. CIT as reported in 377 ITR 533 (Delhi) explained the distinction between business process outsourcing and knowledge process outsourcings as under: "34. We have reservations as to the Tribunal's aforesaid view in Maersk Global Centers (India) Pvt. Ltd. (supra). As indicated above, the expression 'BPO' and 'KPO' are, plainly, understood in the sense that whereas, BPO does not necessarily involve advanced skills and knowledge; KPO, on the other hand, would involve employment of advanced skills and knowledge for providing services. Thus, the expression 'KPO' in common parlanc e is used to indicate an ITeS provider providing a completely different nature of service than any other BPO service provider. A KPO service provider would also be functionally different fro....
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....ce Functions like CFO Functioning, Setting up of Finance Centers - which are of purely Knowledge Outsourcing Process activities and it is a technology solution provider and it is also further contended that this company owns brand value and belongs to Tata Group, which enjoys brand value, and possess intellectual property rights. The TPO rejected the objection of the assessee-company by holding as under. "The Annual report of the company is available. The company is mainly engaged in providing BPO services in BFSI domain. Being functionally comparable, it is being considered." The findings of the TPO were confirmed by the Hon'ble DRP. ii) Being aggrieved, the assessee-company is in appeal before us. It was contended that this company cannot be compared with that of the assessee-company on the grounds that : a) Functionally dissimilar - core business processing services, analytics & insights (KPO) and support services for both data and voice processes. No segmental information regarding BPO services. b) Further, engaged in provision of technology solution, c) Presence of valuable intangibles d) Part of the Tata group hence owns significant brand value that contr....
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....is company satisfies all the filters selected by him. However this company was objected by the assessee-company before the TPO on the grounds of functional differences as it is engaged in the business activities such as printing and allied activities, high profit making company and also fails the employee cost filter, the objections of the assessee-company were over ruled by the TPO by holding as under: "Counter to the objection on Functional Comparability: The functions of the comparable are similar in the sense that the Pre-Press BPO unit provides back office support services. Counter to the objection on High Margins: Reliance is placed on the decisions of the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors and the Delhi Tribunal in Nokia India Pvt Ltd (ITA No. 242/D/2010). Counter to the objection on Employee Cost Filter: The company operates in four major segments viz., Repro, Label Printing, Offset Printing and Pre-press BPO and for our study, only the Pre-press BPO segment has been considered. Therefore, filters are to be applied only on the figures of this segment. The company was specifically asked to furnish the details of emp....
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.... this company is into the business of printers whereas the assessee-company is into the Business Process Outsourcing. Therefore by no structure of imagination these two companies can be considered to be functionally similar and therefore we direct the AO / TPO to exclude this company from the list of comparables. D. BNR Udyog Limited (Medical Transcription segment):- This is a company selected by the TPO and the inclusion of this company was contested by the assessee-company before TPO for the following reasons: "XL Health is engaged in providing the 'Manual claim processing services' to its foreign A.E. Here it is important to mention that the XLHealth Corp. group is, inter alia, engaged in health related insurance business. So the services provided by the assessee under this segment are mainly in the nature of processing on manual basis, the insurance claims lodged by its policyholders. Whereas the Business nature of the Comparable Company BNR Udyog is Medical Transcription services, which is totally dissimilar to that of the Assessee. As XLHealth is engaged in rendering the Medicare Support, Insurance Claims Processing and Data Operations, we find no logical ....
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....that there are no related party transactions. Thus the submissions made by the assessee-company are not supported by material on record. Therefore we do not see any reason to interfere with the findings of the lower authorities. Accordingly, we direct the AO / TPO to include this company in the list of comparables. E. Excel Infoways Limited:- This company was selected by the TPO and the assessee-company had contested its inclusion before the TPO. Though, it was stated before us that the inclusion of this company in the list of comparables was contested before the TPO. A mere look at the explanation filed by the assessee-company pursuant to the show cause notice issued by the TPO, it is clear that this company was not contested before the TPO. Even before the Hon'ble DRP, the objections were filed on the ground that this company does not pass through the filter of export earnings of more than 75% of the earnings and also the employee cost filter of 25%. These objections were over ruled by Hon'ble DRP. The objections of the assessee-company are as under. "7.13 In relation to objection regarding treating Excel Infoways Limited as a comparable, the assessee has submitted that ....
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.... seeking inclusion of the following companies. a) R Systems International Limited (segmental) b) Caliber Point Business Solutions Limited c) Informed Technologies Limited a). R Systems International Ltd.:- This company was rejected by the TPO on the ground that this company follows different financial year for accounting purposes. The exclusion was contested before Hon'ble DRP on the following grounds. - Use of "contemporaneous" data" does not necessarily mean selection of companies having financial year from April to March - Inappropriateness of different accounting year ending filter - Financials cover a 12-month period (like the Assessee), thereby establishing comparability - In light of Hon'ble ITAT judgment in case of Mercer Consulting (India) Private Limited Vs. DCIT (ITA 966/Del/2014), the operating margin (considering the TPO's position regarding operating and non-operating items) pertaining to IT enabled service segment for year ending 31 March 2011 is submitted by the Assessee. i.e., 0.32% - The learned TPO has not cited any instances of functional dissimilarity of R Systems vis-a-vis the Assessee and accordingly, it can be safely ass....
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....y is functionally comparable and the same should not be excluded just on the basis of casual comments of the auditor. This was also argued that 'other income' shown in the accounts was on net basis and so the other expenditure relates to ITES segment. The submissions of the assessee have duly been considered, however the same are not accepted. As per provisions of section 144C (8) read with explanation, the DRP is well within its power to consider the matters arising out of the assessment proceedings relating to the draft order, notwithstanding that such matter was raised or not by the eligible assessee. Further, from the annual report of the company it is observed that the company is having substantial 'other income', which is about 48% of the total revenue, however, segmental details are not available and as such direct and indirect expenses relating to this 'other income' cannot be segregated. Although a part of such income under head 'other non-operating income' is shown to be net of expenses directly attributable to such income, however details of indirect expenses relating to earning of this income as well as direct / indirect expenses for earning the remaining part of 'other....
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....bsp; 6,369,432 1,103,262 Total 6,369,432 1,103,262 15.4 The Company has advanced sums aggregating to Rs. 74,55,954 to Magnachem Pharmaceuticals Pvt. Limited, a company under the same management. In view of the continuing losses, erosion of entire net worth and no signs of recovery in the foreseeable future, the company made full provision for these doubtful advances in the year 2005-2006. During the year name of Magnachem Pharmaceuticals Pvt. Ltd.has been struck off from the Register of Companies on 13th May, 2011 and the Company is dissolved. As a result the advances of Rs. 74,55,954 have been written off in the current year against the provision made in 2005-2006. (emphasis supplied) Considering the facts that segmental data is not available. The action of the management which is prejudicial to the interest of the company and non-existence of internal audit, this company selected by the TPO is directed to be excluded from the list of comparables." The ld. Counsel has not confronted the DRP order. Therefore we uphold the exclusion of this company from the list of comparables. 13. The other grounds of appeal relates to disallowance of depreciation unde....