TaxTMI 
TaxTMI 
2018 (12) TMI 326
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....suing an order without appericiation of facts and law. 2. The Ld. AO erred both on facts and in law in not appericiating that none of the conditions set out in section 92 C (3) of the Incone-Tax act, 1961 ("Act") are satisfied in the present case. 3. The Ld. AO and the Hon'ble DRP erred both on the facts and in law in confirming the transfer pricing adjustment to the income of the Appellant by holding that its international transactions pertaing to provision of IT enabled services ("ITES") and Marketing Support Services ("MSS") do not satisfy the arm's length principle envisaged under the act and made the TP Adjustments of Rs. 3,00,26,199 in ITES and Rs. 1,31,86,494/- in MSS^segments. In doing so, the Hon'SleDRP has grossly erred in agreeing with the Learned Transfer Pricing Officer's ("Ld. TPO's) action of: 3.1 disregarding the arm's length price ("ALP") as determined by the Appellant in the Transfer Pricing ('TP') documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('Rules'); 3.2 disregarding multiple year/ prior years' data as used by the Appellant in the TP documentation a....
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....red in agreeing with the Ld. TPO's action in:- 4.1 disregarding the ALP, as determined by the Appellant in the TP documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Rules; 4.2 rejecting the Transactional Net Margin Method ('TNMM') as the most appropriate method to test the transaction pertaining to availing of intra group services, without appreciating that the transaction is closely linked to the function of the Appellant of providing ITES and MSS; 4.3 applying Comparable Uncontrolled Price ('CUP) Method in contravention of the provisions of Rule 10B of the Rules merely based on presumptions that the arm's length value of the transaction is 'NIL', without furnishing details of price charged in any comparable uncontrolled transaction; 4.4 holding that neither the Appellant has received any service and/ or benefit in lieu of the payment made by it for services availed nor was there was any need for such services/ payments; thereby challenging the commercial wisdom of the Appellant in making such payments while passing the order in contrast with the recent judicial pronouncements in this regard. ....
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....the case by arbitrarily disregarding the documentary evidence submitted by Appellant to support the arm's length nature of the fixed assets purchased from AEs. 6.2 Without prejudice to our grounds above, the Ld. TPO/AO has grossly erred in not giving effect to the directions issued by the Hon'ble DRP in respect of restricting the adjustment to depreciation amount. 7. That the Ld. AO has grossly erred in initiating penalty proceedings u/s 271 of the Act mechanically and without recording any satisfaction for its initiation. 8. That the Ld. AO has grossly erred in levying interest under section 234B and 234C of the Act. The appellant craves leave to alter, amend or withdraw all or any of the grounds herein or add any further grounds as may be considered necessary either before or during the hearing. 2. briefly stated facts relevant to the controversies raised appeal before us, that the assessee is a subsidiary of Avaya International LLC, USA. The assessee was engaged in providing programming and application support for switching integration and PBX systems and specifically dealt with IVR, call centre, AIC, CMS technologies. The assessee also provides mar....
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....rtaken by the assessee are summarized as under: Particulars Provisions of software development service0020 Provision of ITES Provision of MSS No. of comparables 14 10 7 Average OP/OC(%) 15.62% 14.5% 9.95% Appellant's OP/TC (%) 16% 18% 6.48% 2.5 The transactions pertaining to fixed assets and receipt of management services were aggregated with the transaction pertaining to provision of software development services, provision of ITES and provision of MSS. 2.6 The Ld. TPO carried out a fresh search of comparables and after applying various filters proposed adjustment to the international transactions of ITES, CDS and MMS as under: Particulars Provision of ITES Provision of Software Development Provision of MSS No. of comparables 19 18 8 Average OP/TC(%) 26.61% 25.20% 21.41% Appellant's OP/TC 16% 18% 6.48% TP Adjustment (in INR) 194,074,658 160,479,956 25,325,670 2.7 As regard to adjustment to the international transaction of management service fees, the Ld. TPO concluded that no economic and commercial value was derived and no details and evidences were furnished to sh....
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....accepted this comparable as functionally similar to the assessee and this finding of the Ld. TPO has been upheld by the Ld. DRP. The Ld. counsel referred to page 38 to 46 of the Annual Report Compilation and submitted that the comparable company was engaged in providing service and solutions into main areas of healthcare receivable cycle management (HRCM) services and software services for business process outsourcing. The Ld. counsel submitted that the comparable company is engaged in rendering medical transcription services, which are functionally different from ITes services provided by the assessee. He submitted that 68.82% of the total revenue was earned from medical transcription 5.1 According to him medical transcription is an IT enabled service that requires specialized skills in utilizing information technology in converting the voice data of the doctors, who are located anywhere across the globe, consisting of recent history and medical advises into electronic documents. The Ld. counsel submitted the comparable company being functionally dissimilar to the assessee, should not be considered as comparable. 5.2 The Ld. counsel further submitted that the comparable comp....
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....BPO Industry is its ability to move up the value chain through KPO service offering. For the aforesaid reasons, the Special Bench of the Tribunal held that ITeS Services could not be bifurcated as BPO and KPO Services for the purpose of comparability analysis in the first instance. The Tribunal proceeded to hold that a relatively equal degree of comparability can be achieved by selecting potential comparables on a broad functional analysis at ITeS level and that the comparables so selected could be put to further test by comparing specific functions performed in the international transactions with uncontrolled transactions to attain relatively equal degree of comparability. 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 parlance is used to indicate an ITeS provider providing a....
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....a comparable would not be warranted and the transfer pricing study must take that into account at the threshold. 36. As pointed out earlier, the transfer pricing analysis must serve the broad object of benchmarking an international transaction for determining an ALP. The methodology necessitates that the comparables must be similar in material aspects. The comparability must be judged on factors such as product/service characteristics, functions undertaken, assets used, risks assumed. This is essential to ensure the efficacy of the exercise. There is sufficient flexibility available within the statutory framework to ensure a fair ALP." In the light of the above, we find that Accentia is into high end service (KPO), which cannot be compared with the assessee. So, we direct its exclusion from the list of comparables." 5.5 Since in the present assessment year before us also the issue in dispute involved is of comparability of medical transcription function of the company with the ITes function of the assessee, respectfully following the finding of the Tribunal (supra), we direct the AO/TPO to exclude the company from the final set of comparables. B. Eclerx limited: 6....
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....he largest brands in the world. Vishal too had been rated as a leading KPO by Nelso Hall. In addition, it was pointed out that whilst the employee costs incurred by Vishal was relatively low and constituted only 2.30% of its total cost during the relevant year, the hire charges, vendor payments constituted almost 87% of the total costs. According to the AR, this evidenced that Vishal' s business model was different and Vishal had outsourced significant part of its operations. We have heard both the sides and perused the material available on record. The Hon'ble jurisdictional High Court in the case of Rampgreen Solutions Pvt. Ltd. (supra) has held as under :- "36. As pointed out earlier, the transfer pricing analysis must serve the broad object of benchmarking an international transaction for determining an ALP. The methodology necessitates that the comparables must be similar in material aspects. The comparability must be judged on factors such as product/ service characteristics, functions undertaken, assets used, risks assumed. This is essential to ensure the efficacy of the exercise. There is sufficient flexibility available within the statuto....
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....not have a bearing on profitability. Plainly, a business model where services are rendered by employing own employees and using one's own infrastructure would have a different cost structure as compared to a business model where services are outsourced. There was no material for the Tribunal to conclude that the outsourcing of services by Vishal would have no bearing on the profitability of the said entity." In the light of the aforesaid decision of the Honorable jurisdictional High Court in the case of Rampgreen (Supra) wherein the it was held that both these companies cannot be compared with the low end service provider like the appellant in this case. 6.3 We find that the issue in dispute before us in the year under consideration is also whether the knowledge processing services (KPO) of E-clerx can be compared with the low-end BPO services of the assessee. Since the issue in dispute in the assessment year 2008-09, being identical to the present issue in same set of circumstances, respectfully following the finding of the Tribunal (supra), we direct the Ld. AO/TPO to exclude the above company from final set of the comparables. C. Infosys BPO Limited: 7. Bef....
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....bay High Court. 7.4 We have heard the rival submissions and perused the relevant material on the record. The issue in dispute before us is whether the Infosys BPO Limited can be excluded from the final set of the comparables in the instant case on the ground of high brand value and high turnover. We note that the issue of high brand value of Infosys BPO Limited and resultant higher profitability has been adjudicated by the Hon'ble Delhi High Court in the case of EVALUESERVE SEZ (GURGAON) Private Limited (supra) as under: "5. This Court notices that as far as the exclusion of three comparables - M/s. TCS E-Serve Limited; M/s. TCS E-Serve International Limited and M/s. Infosys BPO Ltd. is concerned, the ITAT was cognizant of and took note of the circumstances that these entities had a high brand value and, therefore, were able to command greater profits; besides, they operated on economic upscale. This approach cannot be faulted having regard to the decision of this Court in Pr. Commissioner of Income Tax v. B.C. Management Services Pvt. Ltd. 2018 (89) Taxman.com 68 (Del), which reads as follows: "13. The exclusion of second comparable ICRA Techno Analytics Ltd. ....
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....Tes services, were engaged in technical services involving software testing, verification and validation of the software, which are in the nature of software development services and in absence of segmental result of ITes, the companies cannot be compared functionally with the ITes segment of the assessee. The Ld. counsel relied on the decisions of the Tribunal in the case of Vertex customer services India Private Limited versus DCIT reported in (2017) 88 taxmann.com 286 (delhi-Trib) and Samsung heavy industries India Private Limited versus DCIT (2017) 84 taxmann.com 154 (Delhi-Trib) submitted that companies have been excluded in absence of segmental result and functional dissimilarity. 8.1 On the other hand, the Ld. DR submitted that both the companies were engaged only in providing ITes services and the services of software testing, verification and validation was in respect of the implementation and data centre management for providing the ITes services and thus companies were not engaged in any kind of software development, and therefore being engaged in only one segment, no segmental result for ITes and software development were required in the year under consideration. ....
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....tion to the services offered by Citigroup to its corporate and retail clients. Technical services involve software testing, verification and validation of software at the time of implementation and data centre management activities." 8.5 Thus, we find that the activity of the company are identical to the activity of TCS e-serve international Ltd, which are held in the nature of ITES and functionally similar to the assessee. Accordingly, we hold that the company cannot be excluded on the ground of functional dissimilarity. Further, the expenditure corresponding to contribution to 'Tata' brand by the company, is also very small part (0.43%) of the total operational expenses of the company. The coordinate bench of Tribunal in the cases of Cadence Design Systems Private Limited Vs. DCIT (ITA No.380/Del/2018 for AY: 2010-11, decided on 05.01.2018) and Smart Cube India Private Limited Vs. ITO (ITA No.1103/Del/2015 for AY: 2010-11, decided on 27.04.2018) have also held these two companies as comparable to the companies engaged in providing ITse services. 8.6 In view of the above, we reject the contention of the Ld. counsel of the assessee to exclude the above two companies from the ....
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....been excluded as comparable in the case of Equant solutions India Private Limited (supra) on identical ground. Thus respectfully, following the finding of the coordinate bench in the case of Equant solutions India Private Limited(supra), we direct the Ld.AO/TPO to exclude the said company from the set of the final comparables. 10. Under management support services (MSS) segment, the assessee sought exclusion of following comparables: G. TSR Darashaw Limited: 10.1 The Ld. counsel referred to page 441 of the Annual Reports Compendium and submitted that the company is a leading BPO engaged in providing services of payroll and employees trust administration, record management, register and transfer agents, deposit related services etc. He also referred to page 449 of the Annual Report Compendium, which is profit and loss account of the company, where revenue stream has been shown from service charges only. Thus, according to Ld. counsel, the company is functionally dissimilar to the MSS segment of the assessee. The Ld. counsel also submitted that the company having exceptionally high margin of 41.15 % (OP/TC) should be excluded from set of the comparables. The Ld. counsel reli....
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.... the company from the set of the comparables. H. HCCA Business Services Private Limited: 11. The Ld. counsel referred to clause 2.14 of Notes to account available on page 499 of the Annual Reports Compendium and submitted that the company is functionally similar to the assessee as it was engaged in payroll processing, compensation restructuring, HR operations and Administration, management of labour and legal compliance etc., and thus it cannot be considered as comparable to MSS segment of the assessee. 11.1 The Ld. DR, on the other hand, submitted that the activities of the companies are similar to TSR Darashaw Ltd and under the TNMM, function should be compared broadly on verticals of rendering services. 11.2 We have heard the rival submission and perused the relevant material on record. The company TSR Darashaw Ltd , which was also engaged in payroll processing etc has been directed to be excluded by us in earlier Paras of this order. To have consistency in our finding, the company is also held is functionally dissimilar to the MSS segment of the assessee. Accordingly, we direct the AO/TPO to exclude the company from the final set of comparables. 12. With above di....
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....High Court in the case of CIT vs CUSHMAN AND WAKEFILEF (India) (P.) Ltd Delhi High Court reported [2014| 367 1TR 730 (Delhi). Respectfully following the same we aside this issue back to Ld. TPO for Detailed verification of facts and provision of reasoned conclusions in the light of the decision in the case of CUSHMAN and WAKEFILEF India Private Limited (supra)" 13.4 Thus, respectfully for following the above decision, the issue in dispute is restored to the file of the Ld. TPO for detailed verification is directed by the Tribunal in para 16.2 of the order (supra). Accordingly, the ground no. 4 is allowed for statistical purposes. 14. The ground No. 5 of the appeal was not pressed specifically before us and accordingly was not argued. Thus, it is dismissed as infructuous. 15. The ground No. 6 of the appeal relates to International transaction of purchase of fixed assets of Rs. 9,31,17,292, the arm's length price of which has been determined at NIL, by following the comparable uncontrolled price method (CUP), disregarding the aggregation approach adopted by the assessee. 15.1 The assessee benchmarked the transaction of purchase of fixed asset by aggregating it with transa....
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....e of the opinion that once the TPO himself says that it is a separate international transaction, then it was incumbent upon him to determine the Arms Length Price after carrying out comparability analysis from the uncontrolled comparable transactions by adopting any of the prescribed method. If the assessee has claimed that it has purchased the assets on cost to cost basis and there is no mark up, then it was all the more incumbent upon the TPO to examine the transaction, as to whether under a third party situation what would be he ALP of such transaction. The ALP cannot be determined 'Nil' unless it is brought on record by the TPO that in the third party situation, the cost to such an asset would also be nil. Hence in our opinion, the value of ALP determined for the transaction of purchase of capital asset cannot be taken at 'Nil' and therefore, at the threshold, such an action of the TPO as well as DRP cannot be upheld at all. Moreover, the plea of the assessee before us is that, it is a tax neutral transaction, which proposition finds support from the decision of ITA Nos. 6134/Del/2015, 5829/Del/2015 & 6572/Del/2016 the coordinate bench in the case of Ciena India....
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.... of purchase of fixed assets is determined, then the difference between the transacted value and the ALP does not directly lead to the transfer pricing adjustment. At this juncture, it is pertinent to note the language of section 92(1) which provides that any income arising from an international transaction shall be computed having regard to the arm's length price. It does not say that the total income is to be computed in accordance with the ALP. It is rightly so because the international transactions which have no direct bearing on the total income, cannot give rise to addition on account of difference between their transacted value and ALP. Since the transaction of purchase of fixed assets is a capital transaction, this, in itself, does not affect the total income of the assessee. It is only the off-shoot of such transaction in the capital field, being depreciation allowance on such ALP of the transaction, which affects the total income. To illustrate, if a fixed asset is purchased by an enterprise from its AE for a sum of Rs. 100 and rate of depreciation on such asset is 10%, then the enterprise will charge depreciation amounting to Rs. 10 in its Profit and Loss account. If....
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....al. It has its own exceptions as well. The instant case is a glaring example of exception to the above rule. It is so for the reason that the assessee is getting remuneration from its AE at costs incurred plus a particular mark-up. The cost base includes not only direct but all the indirect costs. The amount of depreciation allowance on fixed assets, including those purchased from AE, is also compensated with the same mark-up. Thus we can say that depreciation allowance and remuneration to the assessee on such depreciation are inseparable transactions. The income in the shape of remuneration to this extent directly depends upon the amount of deprecation allowance. When the assessee is getting mark-up of 13%, the amount of deprecation at Rs. 10 in our above hypothetical example will fetch remuneration of Rs. 11.30. If the amount of depreciation is reduced to Nil, the amount of income to that extent will also be Nil, because the mark-up can be applied only if there is depreciation cost to the assessee. In other words, the transactions of depreciation on one hand and the resultant revenue on the other, go hand in hand. In such a case, where the income is directly based on the costs in....