TaxTMI 
TaxTMI 
TaxTMI 
2018 (12) TMI 326
X X X X Extracts X X X X
X X X X Extracts X X X X
....d 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 and holding that current year (i.e. EY 2009-10) data for comparable compa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....umentation 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. 5. The Ld. AO and the Hon'ble DRP erred both on facts and in law in confirming the determination of the ALP of the Appellant's international tran....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 marketing support services to its Associated Enterprises (AEs), which includes assistance in advertising and promotion of the product sold by 'Avaya' group. The assessee also provides back-office services to its AE....
X X X X Extracts X X X X
X X X X Extracts X X X X
....taining 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 show that services were actually rendered for which management fee was paid. The Ld. TPO selected Comparable Uncontrolled Price (CUP) method as against TNMM adopted by the assessee for benchmarking the payment of management fees. The Ld. TPO determined the ALP at Nil thus, making a TP adjustment of Rs. 2,12,31,617/-on receipt of management services. Simila....
X X X X Extracts X X X X
X X X X Extracts X X X X
....usiness 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 company is operating under one segment though rendering diversified services and thus in absence of segmental data for different segment, it cannot be compared with the assessee. The Ld. counsel further submitted that the company has been excluded from the final set of comparables by the Delhi bench of the Tribunal in the case of the assessee itself for assessment year 2008-09. 5.3 On the contrary,....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 completely different nature of service than any other BPO service provider. A KPO service provider would also be functionally different from other BPO service providers, inasmuch as the responsibilities undertaken, the activities performed, the quality of resources employed would be materially different. In the circumstances, we are unable to agree that broadly ITeS sector can be used for selecting comparables withou....
X X X X Extracts X X X X
X X X X Extracts X X X X
....haracteristics, 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. The Ld. counsel referred to the Annual Report of the company and submitted that the company is engaged in providing data analytics, Data management and process solutions thus it is functionally dissimilar to the ITes segment of assessee. The Ld. counsel also submitted that during the year under consideration, the company has shown very high turnover and supernormal profits and the circumstances being exceptional, the company need t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 statutory framework to ensure a fair ALP. 37. Applying the aforesaid principles to the facts of the present case, it is once again clear that both Vishal and eClerx could not be taken as comparables for determining the ALP. Vishal and eClerx, both are into KPO Services. In Maersk Global Centers (India) Pvt. Ltd. (supra), the Special Bench of the Tribunal had noted that eClerx is engaged in data analytics, data processing services, pricing analytics, bundling optimiz....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ional 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. Before the Ld.TPO, the assessee requested to exclude the company in view of high turnover and profit and brand value of the Infosys. According to the assessee, the brand value has influenced the pricing policy of the company and directly impacted the margins earned by the company and thus, it cannot be compared with the assessee who is providing services to its Associated Enterprise. The Ld. TPO rejected the contention of the assessee and held that high turnover does not have any impact on th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e 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. was on the basis that it had engaged itself in processing and providing software development and consultancy and engineering services/web development services. The reasons for execution were functional dissimilarities and that segmental data were unavailable. Again the findings of the ITAT are reasonable and based on record. The third comparable that the AO/TPO excluded is TCS E-serve. The ITAT observed that though there is a close functional similarity between that entity and the assessee, however, there is a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ate 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. 8.2 We have heard the rival submission and perused the relevant material on record. The contention of the Ld. counsel that TCS E-serve International Ltd is functionally dissimilar, is not found to be correct. On page 31 of the Annual Report of the company, background and principal activities have been mentioned under Schedule N of notes to account. The relevant extract is reproduced as under: "1. Background and principal activities TCS e-Serve International Limited is engaged in the business of providing Information Techn....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tribution 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 final set of the comparables. F. Fortune Infotech Ltd: 9. The Ld. counsel of the assessee submitted that the company is engaged in providing services in the nature of document management, claims processing, rules-based transaction and software solutions and thus it is functionally dissimilar to the ITes segment of assessee. The Ld. counsel also submitted that the company is not satisfying related party transactions (RPT) filter of 25% as in the case of the company RPT for the year under consideration are 24.59 %, which is almost at the threshold of the RPT filter, and ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 relied on the decision of the coordinate bench of the Tribunal in the case of Ciena India Private Limited versus DCIT reported in 80 taxmann.com 372 (delhi-trib) . 10.1 The Ld. DR, on the other hand, referred to page 263 of the appeal set and submitted that the Ld.TPO has rejected the contention of the assessee on the ground that the company is functioning under different verticals and under the TNMM broad similarities have to be seen. The Ld. DR submitted that under the TNMM a company cannot be rejected merely on the ground of high profit margin, if otherwise it is functionally similar....
X X X X Extracts X X X X
X X X X Extracts X X X X
....milar 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 directions, the ground No. 3 of the appeal is allowed partly. 13. In ground No. 4 the assessee has challenged adjustment of Rs. 2,12,31,617/- to the International transaction of intragroup services availed from its AEs. 13.1 In respect of the ground, the Ld. counsel of the assessee submitted that coordinate bench of the Tribunal in the case of the assessee in ITA No. 2298/Del/2014 for assessment year 2009-10 has restored this issue back to the Ld. TPO for detailed verification of the facts and thus issue in the year under consideration being identical, may be restored to the file of the Ld. TPO for decid....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rposes. 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 transactions pertaining to provisions of software development, ITes and MSS. The Ld. TPO rejected the benchmark methodology followed by the assessee and considered the transaction of purchase of fixed asset as separate transaction and therefore required separate benchmarking. The Ld.TPO determined the arm's length price at NIL and rejected the custom authority valuations submitted by the assessee. 15.2 The Ld. counsel of the assessee submitted that depreciation chargeed on the purchase of the fixed asset is subsumed in the cost base of the assessee. The cost pertaining to depreciation has been duly allocated among CSD, ITES and MSS segm....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n 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 Private Limited (Supra) wherein the Hon'ble Tribunal has observed and held as under: 15.2 "We have heard the rival submissions and perused the relevant material on record. It is noticed that the assessee purchased certain fixed assets from its AE with the declared value of Rs. 33.50 crore. In our considered opinion the assessee rightly reported Purchase of fixed assets with the transacted value as an international transaction, since the same is covered within the definition given in sub-section (1) of section 92B, which provides that "international transaction" means a transaction between two or more associated enterprises, either or both....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ction 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 the ALP of such transaction is determined at Rs. 80, then the difference of Rs. 20 cannot be considered as income. Rather, the amount of depreciation will be restricted to Rs. 8 instead of Rs. 10, thereby increasing the total income by Rs. 2. When we advert to the facts of the extant case, it is found that the TPO has rightly held to the effect that it is the amount of depreciation on the purchase of such fixed assets, which will be considered for making addition and not the difference between the transacted value and the ALP determined at Nil. 15.5. Ordinarily an international transaction of purchase of fixed assets by an assessee engaged in a manufacturing o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sessee 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 incurred including ITA Nos. 6134/Del/2015, 5829/Del/2015 & 6572/Del/2016 depreciation, then these two transactions become 'closely linked' transactions, eligible for processing under the TP provisions on a combined basis. It is illogical to compute the ALP of the transaction of purchase of fixed assets and consequently reduce or nullify the amount of depreciation allowance de hors the consideration of international transaction of the revenue from AE, which is equal to depreciation as claimed with mark-up. Both the transactions of claim of depreciation allowance and revenue of depreciation with mark-up have to be seen jointly. The TPO in the present case has simply reduc....