TaxTMI 
TaxTMI 
2017 (8) TMI 1433
X X X X Extracts X X X X
X X X X Extracts X X X X
....t services. It filed its return of income for AY 2010-11 on 11/10/2010 admitting total income of Rs. 33,65,95,390/-. The case was selected for scrutiny and after examining all the details and information submitted by the assessee, the AO completed the assessment by making the following additions and assessed the income at Rs. 88,36,13,747/-. 1. Accrued income shown as unmatured advances in the Balance Sheet of Rs. 51,89,30,155/-. 2. Arm's length Price adjustment u/s 92CA of Rs. 1,49,51,346/- 3. Disallowance of expenditure included in employees cost Rs. 1,43,70,180/-. 3. Aggrieved with the above order, the assessee preferred an appeal before the CIT(A) against the additions in respect of accrued income shown as unmatured advances and Arm's length price adjustment u/s 92CA of the Act. 4. As regards the issue of taxing of accrued income shown as unmatured advances in the balance sheet, the CIT(A) after considering the submissions of the assessee and relying on the decision of the coordinate bench of this Tribunal in assessee's own case for the Previous Years, deleted the addition made by the AO. 5. As regards the addition in respect of international....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed huge direct or indirect expenses on these receipts and postponement of all these receipts results in distortion of true profits. 4. Whatever be the method followed, recognition of revenue has to be in consonance with the method of accounting so followed vis-à-vis the nature and character of the amount accrued or received and the year of such accrual or receipt [State Bank of Travancore 158 ITR 102 (SC)]. The Assessing Officer has the power to adopt the correct method of valuation of closing stock instead of wrong method adopted by the assessee for a long period. Method of stock valuation followed should not only be consistent but should also be correct. British Paints India Limited 188 ITR 44 (SC). Accordingly, the unmatured income of Rs. 51,89,30,155/- is treated as assessee's income and accordingly added back to the income returned." 8. The CIT(A) following the decision of the ITAT in assessee's own case, deleted the addition made by the AO. 9. Aggrieved, the revenue is in appeal before us. 10. Before us, the ld. DR has conceded that the issue in dispute is squarely covered by the decision of ITAT in assessee's own case, while, the ld. AR has ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ntal Representative was that since the assessee has accounted for only proportional receipt, credit for the entire TDS cannot be allowed. On the other hand, the learned counsel supported the order of the CIT(A). On due consideration of the matter, we uphold the order of the CIT(A). Whether a particular Accounting Standard has been notified or not is not material. What is to be seen is whether the assessee has followed a recognized method of accounting or not. If method followed by the assessee is such whereby correct income cannot be deduced, then only the assessing officer has the authority to adopt a reasonable basis to determine the total income. In the instant case,. It cannot be disputed that the assessee has followed a recognized method of accounting and hence, there is no question of adding any further amount to the total income. There being no infirmity in the order of the CIT(A), we uphold the same." Therefore, we do not find any infirmity in the order of the CIT(A) in deleting the addition made by the AO following the decision of the ITAT and, accordingly, we uphold the order of the CIT(A) and dismiss the ground raised by the revenue in its appeal. 11....
X X X X Extracts X X X X
X X X X Extracts X X X X
....m SG Pte. Ltd. 63,28,497 Monster Technologies Malaysia SDN Bhd 66,36,314 Monster Worldwide Inc., USA 27,25,896 17,34,67,871 12.1 After examining the TP study submitted by the assessee, the TPO observed that the assessee has carried out the economic analysis, however, he summarized it as under: Sr.No. Nature of international transaction Amount of transaction MAM PLI Margin of taxpayer Margin of comparables 1 Provision of ITES 5,76,83,907 CPM OP/OC 15 15.5 2 Commission receivable 65,13,815 CUP NA 10 3 3 Commission payable 1,46,82,215 CUP NA 10 3 4 Payment of royalty 1,47,51,888 NA NA NA NA 5 Payment of Sof twareCharges 2,31,30,276 NA NA NA NA 6 Reimbursement of expenses paid 4,10,15,063 NA NA NA NA 7 Reimbursement of expenses received 1,29,64,811 NA NA NA NA 8 Receipt of video Conference equipment 27,25,896 NA NA NA NA 12.2 The TPO has observe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eceivable 62,090 Monster Worldwide Canada Receivable 17,63,607 Monster Worldwide Switzerland AG Receivable 12,238 Monster.com HK Ltd. Receivable 6,72,934 14,26,61,074 12.6 On going through the TP document, the TPO observed that the method of the search process is not in conformity with the TP regulations as also the choice of filters which resulted in selection of inappropriate comparables. The search criteria and the acceptance/rejection matrix applied by the company for screening the initially identified cases for arriving at a final comparable set and the remarks of the TPO were as under: 12.7 Comparables proposed by the TPO and accepted by the assessee are as under: 1. Acropetal Technologies Ltd. (Seg.) 2. Axis IT & T Ltd. 3. Cosmic Global Ltd. 4. Jeevan Softech Ltd. (Seg.) 5. Microgenetics Systems Ltd. 6. Crossdomain solutions Pvt. Ltd. 12.8 Comparables proposed by the TPO and objected by the assessee, are as under: 1. Accentia Technologies Ltd. 2. Eclerx Services Ltd. 3. Infosys BPO Ltd. 4. TCS e-Serve International ltd. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ht to the notice of the Transfer Pricing Officer that the Documentation filed in the preceding year is valid for this year in view of the proviso to Rule-lOD(4) of the Income Tax Rules. 13.1 It was submitted that the Company has been rendering these tele-sales services to three Associated Enterprises at USA, Singapore and Malaysia. All the direct and indirect costs are taken into account separately on a monthly basis and an invoice is raised at an agreed mark-up of 15% to all the Associated Enterprises. The cost and the management fees of 15% charged in respect of these three units, are as under: Sl.No. Name of the Company Cost (Rs.) Mark-up (Rs.) Total (Rs.) 1. Monster Worldwide Inc.,USA 3,44,76,631 51,71,495 3,96,48,12 Monster SG Pte. Ltd., Singapore 1,17,89,200 17,68,380 1,35,57,580. Monster Technologies Malaysi 38,94,088 5,84,113 44,78,201 13.2 The assessee company has contended that it is earning sales commission and paying sales commission in respect of sale of data banks of the Associated Enterprises and that it is charging and paying a sales commission at 10%. The details were ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the tax payer will be enhanced to that extent accordingly u/s 92CA(3) of the I.T. Act". 13.4 It was submitted that ignoring the amounts of profits of Rs. 75,23,988/- shown by the assessee company in respect of international transactions, and in view of the increase in the markup in the cost plus method, the Transfer Pricing Officer has recommended an adjustment of Rs. 64,72,973/-. This amount was accordingly added by the Assessing Officer to the total income. The Transfer Pricing Officer and the assessing officer has also ignored the fact that The agreements in respect of TeIe-rolling activity were entered into the year relevant to the A.Y. 2007-08 and therefore, the mark-up as upheld by the CIT(Appeals) in the appeal in the A. Y. 2007-08, should be adopted far this year also. 13.5 It was submitted that the Transfer Pricing Officer has applied mark-Up of Rs. 12,96,481/- even on the reimbursement of expenses received without appreciating that the said reimbursement in the earlier years were not subjected to mark-Up, The Transfer pricing Officer has added, Rs. 30,75,456/- out of Brand Royalty and Rs. 41,06,436/- out of Software Charges as relating to prior period. While doing t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....der of the Transfer Pricing Officer, adopted the same reasons furnished by the assessee and completed the assessment by accepting 27.90% as determined by the Transfer Pricing Officer. Aggrieved, by the assessment order passed, the assessee filed appeal before the CIT(A)-4, Hyderabad. The assessee in his submissions stated all facts and details as filed before Transfer Pricing Officer and as explained, the mark-up of 15% adopted by the assessee company in the case of cost plus relating to Tele-calling Services, as an Arm's Length Percentage, is not accepted by the Transfer Pricing Officer. The Transfer Pricing Officer has already recommended cost plus 27.90% as Arm's Length Price after considering all the submissions of the assessee. However, the assessee furnished the same submissions before me also which were already decided by the Transfer Pricing Officer. Therefore, I am not finding any reason to interfere with the mark up rate of 27.90% adopted by the Transfer Pricing Officer. Therefore, I am in agreement with the Assessing Officer with regard to adopting the mark up of 27.90% and completing the assessment based on the Transfer Pricing Officer's order. Hence, the additi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ith this company on the ground that assessee's turnover is about Rs. 129.8 crores, which as against turnover of Rs. 1016 crores of the Infosys, ( which is only about 5 times) we are of the view that other contentions with regard to the brand value and brand building exercise, having huge asset base, can be considered to arrive at the conclusion that Infosys is functionally not similar to that of assessee. Infosys BPO stands on its own as an exclusive BPO of the Infosys Technologies and in earlier years, generally Infosys BPO is excluded in many of the cases. Considering these aspects, we are of the opinion that even though the profits of the Infosys BPO Ltd. is reasonable and no super profits are earned, just because of its big brand value, this company has to be excluded on the grounds of functional dissimilarity on FAR Analysis. Therefore, we direct the Assessing Officer/TPO to exclude this company. (2) Genesys International Ltd. 17. It was the contention that this company functions in two horizontals, and is having super profits. It was further submitted that this company is not only in software development but also in Geospatial Services, which are highly tech....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e quite distinguishable from others. In our considered opinion, the fifteen broad categories set out in this Circular cannot per se be claimed as similar to each other. A cursory look at these products/services transpires that some of them are functionally quite different from each other. Further the level of investment required for providing such services is also not consistent. In our considered opinion, the mere fact that two services are placed under this category do not become automatically comparable. If a case providing one category of services under ITES is claimed as comparable with another in the category of service under ITES as per this circular, then it must be shown ex facie that it is broadly similar. Adverting to the facts of the instant case, we find that the services rendered by Genesys fall under clause (vi) with the heading 'Geographical Information Systems Services', whereas those rendered by the assessee fall partly under clause (vii) with the heading 'Human Resources Services' and partly under clause (xi) with the heading 'Payroll'. On juxtaposition examination of these two sets of services, we find that there is a vast difference which make one quite distinc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sessing Officer/TPO to exclude this company. (4) Cosmic Global Ltd. 19. The main objection of assessee with reference to the inclusion of this company is with reference to outsourcing of its main activity. Even though this company is in assessee's TP study, it has raised objection before the TPO that this company's employee cost is less than 21.30% and most of the cost is with reference to the outsourcing charges or translation charges, and as such this is not a comparable company. The TPO, though considered these submissions, rejected the same, on the reason that this does not impact the profit margin of the company. Opposing the view taken by the TPO, it is submitted that this company cannot be selected as comparable, as similar issue was discussed by the coordinate Bench of the Tribunal(Delhi) in the case of Mercer Consulting (India) P. Ltd. (supra), vide paras 13.2 to 13.3 which read as under- "13.2. Now coming to the factual matrix of this case, we find from the material on record that outsourcing charges of this case constitute 57.31% of the total operating costs. This does not appear to us to be a valid reason for eliminating this case from the lis....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ropetal Technologies Ltd. (seg.) 20. The objection of assessee with reference to this company is that the company is involved in engineering design services and high end services and has products in its inventory. It is also involved in R&D activity and developing sophisticated delivery system. It was further submitted that this company is not functionally comparable at segment level also, as engineering design services are high end services, as considered in other cases. It is further submitted that allocation of expenses between segments is not possible and depreciation was not allocated between the segments. There are extra-ordinary events which impact profit also, as can be seen from the Annual Reports. It is further submitted that this company is not selected in the list of comparables selected in the case of Mercer Consulting (India) Pvt. Ltd. and therefore, selection of the company by the TPO in this case, which is also in similar ITES services, is not proper. 20.1 After considering the rival contentions, we agree with the objections raised by assessee. As seen from the Annual Report, this company is involved in engineering design services and has products ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....aforesaid companies from the list of comparables and recompute the ALP afresh. Accordingly, the grounds raised by the assessee are allowed." 17.1 With regard to comparables i.e. Crossdomain Solutions Ltd. and TCS E Serve Ltd., the coordinate bench of this Tribunal in the case of S&P Capital IQ (India) Ltd., in ITA No. 200/Hyd/16, order dated 27/07/2016, has directed the TPO/AO to exclude from the list of comparables, by observing as under: 1. Crossdomain Solutions Ltd. This company was considered as a comparable and listed at Sl.No.7 of the comparables chosen by the TPO. It is the stand of the assessee that this company is not functionally comparable. It is seen that the business profile of this company is re-engineered payroll service. This company is also engaged in the development of information systems. The review and business functions of Cross Domain is as follows:- "With a decade of experience in Payroll Outsourcing, Crossdomain. has created a re-engineered payroll service EFFIPAY - that processes and delivers accurate payroll to clients with headcount up to 1000 employees in just 4 hours", With Effipay Lite and Effipay Lite Plus, our bouquet of services....
X X X X Extracts X X X X
X X X X Extracts X X X X
....p companies introduced globally the transaction processing include the broad spectrum of activities involving the processing, collections, customer care and payments in relation to the services offered by Citi group to its corporate and retail clients. As per the annual report, the company also provide technical services involving software testing, verification and validation of software at the time of implementation and data centre management activities, which makes the company functionally incomparable with the assessee, accordingly, we direct the assessing officer to exclude the above company from comparables". Even though, Ld. DR has argued vehemently for inclusion, we do not see any reason to include as this company is functionally different and being excluded in many cases in earlier years as well being unique in the functionality." 17.2 Even in the case of M/s Corporate Executive Board India Pvt. Ltd., ITA No. 6328/Del/2012 and others, order dated 17/03/2017, the coordinate bench at Delhi directed the TPO/AO to exclude the said companies as comparables. 17.3 Therefore, following the said decisions of ITAT as well as rule of consistency, the companies objected ....