TaxTMI 
TaxTMI 
2018 (8) TMI 1205
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.... year under consideration were as under:- i) IT-enabled back office research and data analysis - Rs. 50,97,48,542/- ii) Reimbursement of expenses received by the company - Rs. 8,23,09,998/- iii) Reimbursement of expenses by the company on account of Employee Stock Option Plan issued to the employees of the company - Rs. 21,67,376/- 2.1 The assessee applied Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) and OP/OC ratio was taken as the Profit Level Indicator (PLI) in the TNMM analysis. The assessee had taken itself as the tested party and the PLI was computed at 19.41%. The assessee chose a set of nine comparables with a PLI of 22.41%. Thus, the assessee considered its international transaction to be at arm's length. 2.2 The return of income was filed declaring an income of Rs. 16,42,41,218/-. In view of the international transactions entered into by the assessee, a reference was made to the Transfer Pricing Officer (TPO). The TPO drew a final set of nine comparables with an average PLI of 26.24% and proposed an adjustment of Rs. 13,20,31,648/- with respect to Arms' Length Price (ALP) of the international transactions. ....
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....g its TP documentation; 3.3. rejecting the economic and comparability analysis in the TP documentation/ fresh search and in conducting a revised comparability analysis based on application of the following additional/ revised filters in determining the ALP: 3.3.1. exclusion of companies having different financial year ending (i.e. not March 31, 2012); 3.3.2. exclusion of companies having employee cost less than 25% of the operating cost; 3.3.3. exclusion of companies whose service income is less than Rs. 1 crore (as against companies having zero sales or ceased business operations and were inactive); 3.3.4. exclusion of companies with export sales that are less than 75% of their total revenue (as against export sales to sales less than 25% applied by the Appellant). 3.4. not appropriately considering the functions, assets and risk profile of the companies used for comparison with the Appellant, thereby including in the final comparable set certain companies with completely different functional profile; 3.5. excluding certain companies considered by the Appellant in its TP Documentation/ fresh search on arbitrary/ frivol....
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.... working capital adjustment (as directed by the Ld. DRP while making adjustment on provision of IT enabled services) takes into account the impact of outstanding receivables.' 3.0 The Ld. Authorised Representative (AR) submitted that ground no. 1 was general in nature and ground nos. 2 and 3 (3.1 to 3.7) incorporate the assessee's challenge to comparables/ companies which the assessee was either seeking to be excluded or included. It was further submitted by the Ld. AR that the assessee was also challenging the denial of depreciation adjustment in margin computation of comparables as well as was challenging the negative capital working adjustment. The Ld. AR further submitted that the assessee was also challenging consideration/reimbursement received from AEs as part of operating revenue and operating cost while computing margin of the assessee. The Ld. AR also submitted that the assessee was also challenging the adjustment pertaining to interest on outstanding revenues as well as disallowance u/s 14A of the Act. 3.1 The Ld. AR submitted that the assessee had raised a specific ground during the proceedings before the Ld. DRP in respect of the assessee seeking adjustment claim....
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....ital adjustment was not warranted in the assessee's case. 3.3 The Ld. AR further submitted that the reimbursement of expenses received from the AEs were in the nature of expenses incurred by the assessee on behalf of the Associated Enterprises and since these costs essentially comprised third party costs, these reimbursements were considered to be at arm's length by the assessee in its transfer pricing study. However, post the directions of the Ld. DRP, the TPO considered the reimbursements received to be part of the operating revenue as well as operating cost resulting in the margin of the assessee being computed at 16.29%. It was further submitted that these reimbursements received were mere pass through costs which should be excluded while computing the operating margins of the assessee. Alternatively, it was submitted that similar adjustment with respect to the reimbursements should be made in the case of comparables also. The Ld. AR placed reliance on a number of judicial precedents to support his averment that reimbursements should be excluded while computing the operating margins of the assessee. 3.4 With respect to the adjustment made by the TPO on account of notional....
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....tia had been rejected in the cases of Avaya India (P) Ltd., Vodafone India Services P. Ltd. and Exevo India (P) Ltd. by the Delhi Benches of the ITAT. The Ld. AR also submitted that during the year under consideration Accentia had launched eight different products and there was amalgamation/acquisition during the year which warranted exclusion of this company from the final set of comparables in the case of the assessee. (iii) TCS E-Serve Ltd: The Ld. AR submitted that this company rendered both Business Process Outsourcing (BPO) services as well as KPO services and also provided support services for both data and voice processes whereas the assessee company was only engaged in providing back office Information Technology Enabled Services (ITeS) and data analytics service to its associated enterprises. It was further submitted that the size of TCS E-Serve Ltd. as well as its turnover was significantly higher than that of the assessee company which was approximately more than 31 times of the assessee's turnover. It was further submitted that TCS E-Serve Ltd. owned intangibles in the form of software licences which was not so in the case of the assessee company. The Ld. AR also....
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....lable on website, the results for the financial year can be extrapolated. Reliance was placed on numerous orders of the ITAT Delhi Benches wherein R Systems International Ltd. was directed to be included as a comparable irrespective of different financial year ending. 3.7 Arguing against the disallowance of Rs. 4,69,227/- made u/s 14A of the Act, the Ld. AR submitted that section 14A r/w Rule 8D could not be invoked when no satisfaction had been recorded by the Assessing Officer so as to establish a reasonable nexus between expenditure disallowed and dividend income earned. It was further submitted that in the assessee's case, the dividend was automatically credited to assessee's account without any effort as the assessee had invested in mutual funds in ICICI Liquidity Plan wherein the dividend was automatically re-invested with weekly frequencies. The Ld. AR also submitted that the assessee did not have any borrowings which could be said to have been used for making the investment in the mutual funds. It was reiterated by the Ld. AR that the Assessing Officer had not given any specific reason for not agreeing with the claim of the assessee regarding no expenditure having been i....
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....e has provided depreciation. In doing so, if the comparable companies have charged depreciation at a lower rate in comparison with the assessee, then suitable increase should he made to their amount of depreciation and if the comparables have charged depreciation at a higher rate in comparison with the assessee on some of the assets, then suitable reduction should be made in the amount of their depreciation. Here it is significant to note that one of these four companies, namely Nucleus Netsoft and GIS India Ltd has charged depreciation on all its assets under SLM except for Computers, on which it provided depreciation on written down value basis. The TPO should see if he can correctly deduce the amount of depreciation, on the basis of data available for the year on 'Computers' also under SLM. If due to one reason or the other, such precise calculation is not possible, then no adjustment should be carried out in the calculation of the operating profits of this company, even on other items of assets. Ordinarily, we would have ordered for the exclusion of this company from the list of comparables in the event of no possibility of computing depreciation on computers under the SLM by c....
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....s been partially resolved vide order passed u/s 154 dated 11.01.2017 wherein the proposed adjustment of Rs. 163,651,494/- has been reduced to Rs. 82,289,042/- after rectifying the order of not considering the reimbursements as part of the revenue. It is the plea of the assessee that the reimbursements should be excluded both from the margins of the assessee as well as of the comparables. The Ld. AR has also drawn our attention to copy of evidences filed before the TPO/Assessing Officer in this regard. While agreeing with the contention of the assessee that reimbursements should be excluded from both the assessee's margins as well as the margins of the comparables, we deem it fit to restore the issue to the TPO/Assessing Officer for examining the claim of the assessee in light of the evidences filed by the assessee along with its application dated 21.1.2016 and submitted to the office of DCIT - TP- 2(3)(1) New Delhi. Thus, this ground stands allowed for statistical purposes. 5.3 Coming to the issue of notional interest being charged on receivables, we find that this issue is covered in favour of the assessee by the order of ITAT in assessee's own case for assessment year 2010-11 ....
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....this company in this year as the functional profile of the assessee has remained the same. Therefore, in view of the principle of consistency as well as in view of settled judicial precedent, we direct exclusion of this company from the final set of comparables. (ii) Accentia Technologies Limited: The assessee has objected to this company being included in the final set of comparables on the ground that this company has a different business profile from that of the assessee company. It is undisputed that the assessee is a captive IT enabled service provider whereas as per the Annual Report of Accentia Technologies Limited, this company is engaged in offering medical transcription related services and is also into creation and selling of software products. We also note after going through the Annual Report of this company that no segmental results are available in the case of this company. We note that the business activity of Accentia Technologies Limited has been classified under a single segment namely 'Healthcare Receivables Management' and the profit and loss account of this company shows income from three sources viz. medical transcription, medical discreet reportable tr....
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.... keeping in view the settled judicial view in respect of this company, we are unable to agree with the contention of the Ld. CIT DR and we direct the exclusion of this company from the final set of comparables. (iv) Acropetal Technologies Ltd (segment): It has been submitted by the Ld. AR that this company is engaged in provision of healthcare services which include Electronic Medical Record, patient life cycle management, physical and clinical life cycle management, hospital administration management and disease life cycle management. It has also been submitted that segmental bifurcation pertaining to the various revenue streams was not disclosed. We find that these averments of the AR are correct. We also note that this company was directed to be excluded by the ITAT Delhi Bench in the case of Agilis Information Technologies Pvt. Ltd vs. ACIT reported in (2018) 89 taxmann.com 440 (Delhi - Trib.) on the ground that Acropetal Technologies Ltd. was engaged in provision of high end healthcare services and owns intellectual property. It has also been noted by the ITAT Delhi Bench that this company was engaged in sale of software productw. Undisputedly, the assessee company i.e. ....
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....g Officer did not record any satisfaction before invoking provisions of section 14A r/w Rule 8D. A perusal of the final assessment order shows that the Assessing Officer has observed that the assessee has maintained a consolidated bank account which has own funds as well as borrowed funds. The Assessing Officer has observed that the primary onus was upon the assessee to prove that the source of investment was from own funds and that no part of borrowed funds were invested in the investment of mutual funds. The Assessing Officer has also noted that no reconciliation has been filed by the assessee in respect of the amount available in the bank account relating to own funds or borrowed funds as the assessee had not furnished day-wise balance of own funds and borrowed funds along with corresponding entry of the investment made. The Assessing Officer has, thereafter, proceeded on an assumption that interest bearing funds could also have been utilized for making the investment. The assessee, on the other hand, has submitted that the investments were made in mutual funds in ICICI Liquidity Plan wherein the dividend was automatically reinvested with weekly frequency and there were no effor....