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TaxTMI 
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2017 (10) TMI 1434
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.... of the case and in law, the order passed by the Ld. Assessing Officer ("AO") is bad in law. 2. The Ld. Dispute Resolution Panel ("DRP") erred in confirming the Ld. AO/ Ld. Transfer Pricing Officer's ("TPO") approach of enhancing the income of the Appellant by Rs. 15,39,24,517/- holding that the international transactions pertaining to provision of Information Technology enabled services ("ITeS") do not satisfy the arm's length principle envisaged under the Act. In doing so, the Ld. AO/ Ld. TPO have grossly erred in; 2.1. rejecting the Transfer Pricing ("TP") documentation maintained by the Appellant under section 92D of the Act and Rule 10D of the Income-tax Rules, 1962 ("Rules") and in doing so not appreciating that none of the conditions set out in section 92C(3) of the Act are satisfied in the present case; 2.2. ignoring the fact that the Appellant is entitled to tax holiday under section 10A and 10AA of the Act on its profits and therefore would not have any untoward motive of deriving a tax advantage by manipulating transfer prices of its international transactions; 2.3. disregarding the Arm's Length Price ("ALP") as determined ....
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....iving appropriate/ due regard to economic considerations applicable in the instant case; 3. The Ld. AO/ Ld. TPO erred in not sharing the basis of arriving at the revised TP adjustment while passing the final TP order 4. The reference made by the Ld. AO suffers from jurisdictional error as the Ld. AO has not recorded any reasons in the draft assessment order based on which he reached the conclusion that it was 'necessary or expedient' to refer the matter to the Ld. TPO for computation of the ALP, as is required under section 92CA(1) of the Act. 5. The Ld. AO/ Ld. TPO has grossly erred on facts and in law by disregarding judicial pronouncements in India in undertaking the TP adjustment. 6. That on the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 271(1)(c) of the Act mechanically without recording any adequate satisfaction for such initiation. 7. The Ld. AO has erred in law and on the facts of the case by charging and computing interest under section 234B of the Income tax Act, 1961. The above grounds of appeal are mutually exclusive and without prejudi....
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.... 3. Cosmic Global Ltd., 4. e4e Healthcare 5. ICRA Online Ltd., 6. Jeevan Scientific Technology Ltd., 7. Infosys BPO Ltd., 8. Jindal Intellicom 9. Mindtree Ltd., 10. iGate Global Solutions Ltd., 5. On the basis of TPO's report, the draft order was prepared by the AO against which assessee has filed the objections before the DRP. DRP has re-examined the claim of the assessee and has finally taken 7 comparables after rejecting 3 comparables i.e., Infosys BPO Ltd., Mindtree Limited and iGate Global Solutions Limited. 6. Aggrieved with the findings of the DRP, assessee has preferred an appeal before the Tribunal and sought the exclusion of Accentia Technologies Ltd., Acropetal Technologies Ltd., ICRA Online Ltd., and Jeevan Scientific Technology Ltd. During the course of hearing, the learned counsel for the assessee, through the chart did not raise any objection with regard to the inclusion of ICRA Online Ltd. Therefore, we find no justification to exclude this comparable from the list of comparables. So far as exclusion of Accentia Technologies Ltd., Acropetal Ltd., and Jeevan Scientific Technology Ltd., are concerne....
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....ound to be functionally different. The relevant observations of the Tribunal as recorded in para 19.2 of the order passed in the case of Excellence Data Research Pvt. Ltd., Hyderabad (supra), being relevant in this case, are reproduced below- "19.2 We have considered the rival contentions and noticed that this company operates in a different business strategy of acquiring companies for inorganic growth as its strategy. In earlier years on the reason of acquisition of various companies, being an extraordinary event which had an impact on the profit, this company was excluded. As submitted by the learned counsel, this year also, the acquisition of some companies by that company may have impact on the profit. Considering the profit margins of the company and insufficient segmental data, we are of IT(TP)A No.146/Bang/2015 Page 42 of 52 the opinion that this company cannot be selected as a comparable. Moreover, this is also not a comparable in the case of M/s. Mercer Consulting (India) (P.) Ltd. (supra), which indicates that the TPO therein has excluded it at the outset. In view of this, we direct the Assessing Officer/TPO to exclude this comparable, from the list of comparable....
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....nguished. According to him, Acropetal Technologies Ltd, was giving engineering design services and the assessee was rendering insurance support services. Though these services did not fit in the same mould, the level of expertise required stood more or less on the same pedestal. According to him, applying the yardsticks laid down by Hon'ble Delhi High Court in the judgment of Rampgreen Solutions (P.) Ltd. (supra), Acropetal Technologies Ltd, could be taken as a good comparable. 23. We have perused the orders and heard the rival contentions. There is no dispute that M/s. Acropetal was having at least three segments, namely, engineering design services, IT service and health care. TPO had taken engineering design service as a good comparable with that of the services done by the assessee. Engineering Design Services that were being rendered by Acropetal Technologies Ltd, appears at page 8 of its annual report. It comprised of architectural, structural, electrical, plumbing, steel detailing, and utilities designing. Its revenue model appears at page 9 of its annual report. It is mentioned that the said company was providing comprehensive offerings using its deep domain un....
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....d. AR, the total operating revenue of the said company for the relevant previous year was only Rs. 2.49 crores of which substantial part was from other streams of operation. 30. Per contra, Ld. DR submitted that the segment considered by the TPO had a turnover of Rs. 246,75,00,000/-. Thus according to him Jeevan Scientific Technologies Ltd, (seg), was a good comparable. 31. We have heard the rival contentions. Audited balance sheet and financial statement of Jeevan Scientific Technologies Ltd, (seg), taken from capitaline data base has been filed before us by the assessee at paper book page.677 to 740. Net revenue of the said company for the relevant previous year from its operation was Rs. 2,45,39,231/-, as per its income statement at paper book page 725. TPO had considered the revenue as Rs. 2,46,75,000/-. However segmental revenue of the said company, as it appear at paper book page 719 show its earnings from BPO operations is Rs. 71.219 lakhs. Thus TPO had considered the total revenue instead of the segmental revenue. The turnover of the segment which was being compared was less than Rs. 1 crore and by the yardstick applied by the TPO himself, the company ough....
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....ear, the comparable should be included in the list of comparables, the learned counsel for the assessee has relied upon the order of the Tribunal in the case of Business Process Outsourcing Pvt. Ltd., Vs. ACIT in IT(TP)No.238/Bang/2016, M/s. Mercer Consulting India Pvt. Ltd., Vs. DCIT in ITA No.101/2015 (Punjab & Haryana High Court) and Mckinsey Knowledge Centre India Pvt. Ltd., in ITA No.217/2014 (Delhi High Court). Copy of these orders are placed on record. The learned DR placed reliance upon the order of the DRP. 10. Having carefully examined the orders of the lower authorities in the light of rival submissions, we find that it has been repeatedly held through various orders by the Tribunal that wherever the data for the relevant financial year can be derived from the data available on the website and that comparables stands on other filters, the same should be included in the list of comparables. In the instant case, assessee has tried to demonstrate that data for the relevant financial year (April to March) can be derived from the data available on website. Therefore, we are of the opinion that this comparable should be included in the list of comparables and before doin....
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....ice provider, the assessee does not own any interest in intangibles. It provides mere service in return of fixed mark up on cost incurred in granting of services. Whereas the comparables selected by the TPO are independent risk bearing entities. It is an admitted fact that in the open market any entity assuming increased risk will also be compensated by increase in the expected return in the long run. Under these circumstances where risk factor is different in the case of assessee as well as comparables, risk adjustment should be allowed while computing the ALP for international transactions. This aspect was examined by the Tribunal in the case of Intellinet Technologies India Pvt. Ltd., and Bearing Point Business Consulting Pvt. Ltd., (Supra) in which the Tribunal has directed the TPO to consider all the contentions of the assessee and after taking into account all the relevant material decide the percentage of risk adjustment to be made in accordance with law. The relevant observation of the Tribunal in the case of Intellinet Technologies Ltd, is extracted hereunder: "7.1 As seen from the records, the assessee had acquired the business and also earned income out of the s....
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....f treatment cannot be given in the case of assessee company and the comparables. Therefore we also restore the issue to the AO/TPO to examine the facts relating to provision for doubtful debts in the assesse company as well as in the case of comparables. 15. Through ground No. 2.9, the learned counsel for the assessee has contended that the DRP erred in rejecting the assessee's claim of adjustment on account of accelerated depreciation. In this regard, the learned counsel for the assesse has contended that it depreciates its asset at higher rate then the rates prescribed by the Schedule XIV of the Companies Act, 1956. However, most of the comparable companies considered by the learned TPO followed rates as prescribed under Companies Act thereby charging a lower rate of depreciation. Therefore an adjustment on account of differential in the rates of depreciation charged by the appellant vis-à-vis, the comparable should be given. In support of his contention, that when applying the arm's length principle, the conditions of the controlled transactions (transaction between the tax payer and the AE) are compared to the conditions of the comparable uncontrolled transactions. In....
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.... that when we consider the operating profit margin, the effect of all the individual higher or lower items of expenses or incomes gets submerged in the overall operating profit margin, ruling out the need for any adjustment on one-to-one comparison. One company may have taken a building on rent for carrying on its business, in which case, it will pay rent which will find its place in the operating costs. For the purposes of making comparison, one cannot contend that the payment of rent by one enterprise in comparison with a non-payment of rent by another, should be neutralized by giving proper adjustment from the operating profit of the comparable. The manifest reason is that the other enterprise may have its own office premises and the amount of depreciation on such premises will also form part of its operating cost. When we consider the operating profit of the first enterprise which is paying rent and then compare it with the second enterprise which is not paying any rent but is claiming depreciation on its own premises, the overall effect of rent in one case gets counterbalanced with depreciation on premises of the other. Similar is the position of a company having purchased new....
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....e help of an example. Other things being equal, if the operating profit of company A, after claiming depreciation of Rs. 10 on the value of asset worth Rs. 50 with rate of depreciation 20%, is Rs. 100, the operating profit of company B with everything same including the value of assets at Rs. 50, but with rate of depreciation 30%, will be Rs. 95. It shows that the comparability is jeopardized due to higher rate of depreciation charged by company B at 30% in comparison with lower rate of depreciation charged by company A at 20%. In such a situation, although both the companies use similar type of assets and everything else is also equal, but their respective operating profit percentages undergo change due to higher or lower rate of depreciation, thereby distorting their comparability. It is this difference in the amounts of depreciation due to different rates of depreciation and not due to different quantums of depreciation simiplicitor, which calls for bringing both the companies at par. 5.15 At this juncture, we will consider the ratio of the decisions relied by the ld. DR to bolster his submission for not granting any adjustment on account of difference in the rates of d....
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....l eventually remitted the issue of depreciation, as raised through the additional ground, to the file of the AO/TPO for a fresh consideration and decision. So, this order also does not support the case of the Revenue. The last case relied by the ld. DR is Lason India (P.) Ltd. v. ACIT 2012-TII-47-ITAT-MAD-TP.The assessee in that case provided depreciation on assets under SLM at the rates higher than those provided in Schedule XIV, whereas the comparables provided for depreciation as per Income-tax Rules on written down value method. The assessee claimed before the tribunal that if depreciation of the assessee is also brought to the w.d.v. method, then its operating profit would be more. The tribunal rejected this claim of the assessee. In our considered opinion, the adjustment has been rightly denied because the method of charging depreciation was different and further the assessee sought adjustment from its profits, which is not permissible as will be seen infra. The ld. AR also candidly admitted that his point was limited to the adjustment due to difference in the rates of depreciation from SLM of the assessee to SLM of the comparables and not otherwise as is the position in Laso....
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....e net operating profit margin on a long term basis. He stated that the higher rates of depreciation would no doubt lower the profit in the earlier years, but such reduction of profits would be set off with the higher amount of profit due to lower amount of depreciation in the later years, thereby, nullifying the effect of such higher rate of depreciation over the life time of an asset. Asserting on this argument, the ld. DR stated that no adjustment could be accordingly allowed. 5.21 This contention, in our considered opinion does not move forwards the case of Revenue for the reason that Chapter X of the Act requires computation of income from international transactions having regard to ALP on year to year basis. There is no provision for determining the ALP of an international transaction for more than one year in a consolidated manner. Unlike the hitherto determination of undisclosed income for the block period as provided under Chapter XIV-B of the Act, as opposed to year-to-year basis, there is no such provision for determining the ALP of an international transaction for more than one year by considering a few years as one unit during which an asset is put to use. Not ....
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.... with the above arguments of the ld. AR, then a simultaneous negative adjustment on account of the above factor should also be directed. 5.22.2 This contention advanced on behalf of the Revenue can be properly appreciated if one understands the striking dissimilarities between the scheme of charging depreciation under the Income-tax Act, 1961 and the Companies Act, 1956. The concept of block of assets exists under the Act by which all the assets of a particular species having the same rate of depreciation are considered together as one unit. This can be seen from sec. 2(11) of the Act, which defines "block of assets" to mean 'a group of assets falling within a class of assets comprising- (a) tangible assets, being buildings, machinery, plant or furniture; (b) intangible assets, being ........, in respect of which the same percentage of depreciation is prescribed'. Under the scheme of block of assets, depreciation is charged on the total written down value of such block as appearing at the end of the year at the prescribed rates. There is no provision for charging depreciation on individual assets. Similarly, there is no mandate for computing capital gain at the tim....
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...., 1956. Section 349 deals with the determination of net profits. Sub-section (1) provides that in computing the net profits of a company in any financial year, : '(a) credit shall be given for the sums specified in sub-section (2) and credit shall not be given for those specified in sub-section (3); and (b) the sums specified in subsection (4) shall be deducted, and those specified in sub-section (5) shall not be deducted.'. Clause (k) of sub-section (4) states that deduction shall be allowed for 'depreciation to the extent specified in section 350'. The later section, in turn provides that: 'The amount of depreciation to be deducted in pursuance of clause (k) of sub-section (4) of section 349 shall be the amount of depreciation on assets as shown by the books of the company at the end of the financial year expiring at the commencement of this Act or immediately thereafter and at the end of each subsequent financial year, at the rate specified in Schedule XIV.' Clause (d) of sub-section (3) states that in making the computation aforesaid, no credit shall be given for 'profits from the sale of any immovable property or fixed assets of a ca....
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....of a simple example. If asset A with original cost of Rs. 100 having w.d.v. of Rs. 40 is sold for Rs. 50, then the profit of Rs. 10 is to be credited to the Profit and Loss account for the year of sale of such asset. If asset A with original cost of Rs. 100 having w.d.v. of Rs. 40 is sold for Rs. 30, then the loss of Rs. 10 is to be debited to the Profit and Loss account for the year of sale/scrapping of such asset. 5.22.5 On a comparative study of the scheme for charging depreciation and treatment of profit/loss on the sale of specific assets under both the statutes, we observe that whereas, the Act does not recognize individual assets for the purposes of allowing depreciation and grants depreciation on the block of assets, the Companies Act recognizes the existence of separate assets and stipulates depreciation on each asset distinctly in the Profit and loss account. When an asset is sold, there is no scope for calculating profit or loss on sale of each asset in excess of its w.d.v. under the Act. It is done only for the block of assets in the manner given and to the extent enshrined in section 50. On the other hand, the Companies Act mandates claiming deduction for loss....
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....view of above discussion, we hold that the operating profit margins of these four comparable companies should be recomputed by the TPO/AO in line with the rates of depreciation charged by the assessee under SLM. To put it simply, the amount of depreciation of the four comparable companies on their assets shall also be recomputed under the SLM alone as per the rates at which the assessee 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 be 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 S....
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....out appreciating the facts of the case and its comparables. In this regard, this issue has already been adjudicated by us in the assessee's appeal and we restore the matter to the file of the AO/TPO to verify the facts and to allow the risk adjustment if he finds that the different nature of risk is involved in business activities of the assessee's and the comparables. Accordingly, this ground is disposed off. 20. IT(TP)A No. 535/Bang/2017 This appeal is preferred by the assessee against the assessment order framed consequent to directions of DRP inter alia on following grounds. 1. That on the facts and in the circumstances of the case and in law, the order passed by the Ld. Assessing Officer ("AO") is bad in law. 2. That the Ld. Dispute Resolution Panel ("DRP")/ Ld. AO erred in law and on the facts and in the circumstances of the case in reducing the deduction allowable under section 10AA of the Act by Rs. 279,138. The said adjustment is on account of expenditure incurred on telecommunication expenses from the export turnover and total turnover. 2.1. That the Ld. DRP/ Ld. AO ought to have appreciated that the telecommunication expenses can be reduc....
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....hnology enabled services ("ITeS") do not satisfy the arm's length principle envisaged urireithe Act. In doing so, the Ld. AO/ Ld. TPO have grossly erred in: 4.1. rejecting the Arm's Length Price ("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 as well as the fresh search and in particular modifying/ rejecting the filters applied by the Appellant; 4.2. disregarding multiple year/ prior years' data as used by the Appellant in the TP documentation and holding that current year [i.e. Financial Year ("FY") 2011-12] data for comparable companies should be used despite the fact that the same was not necessarily available to the Appellant at the time of preparing its TP documentation; 4.3. collecting selective information of the companies by exercising power granted to him under section 133(6) of the Act that was not available to the Appellant in the public domain and relying on the same for comparabi lity purpose (and to the extent of completely ignoring reliable data available in public domain/ annual reports in numerous cases). 4.4. rejecting ....
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....ofit margins of the comparables; 5. Ld. AO/ Ld. TPO erred in not giving appropriate effect to the directions passed by the Hon'ble DRP and not sharing the basis of arriving at the revised TP adjustment while passing the final TP order. In this regard, a rectification letter has been filed before the Ld. AO/ Ld. TPO. 6. The reference made by the Ld. AO suffers from jurisdictional error as the Ld. AC has not recorded any reasons in the draft assessment order based on which he reached the conclusion that it was 'necessary or expedient' to refer the matter to the Ld. TPO for computation of the ALP, as is required under section 92CA(1) of the Act. 7. The Ld. AO/Ld. TPO has grossly erred on facts and in law by disregarding judicial pronouncements in India in undertaking the TP adjustment. 8. That the Ld. AO has grossly erred on facts and in law by initiating penalty proceedings under section 271(1)(c) of the Act mechanically and without recording any satisfaction for its initiation. 9. That the Ld. AD has erred in law and on the facts of the case by charging interest under section 234B and section 234C of the Act. The abov....
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....ver, in order to bring clarity on the existing ground no. 4.5 and 4.6, we are elaborating the name of each comparble company which is sought for rejection/acceptance. On the above basis, we humbly request the Hon'ble bench members to reject/ include the above-mentioned companies from the final set of comparable. Ground No. 4.9A: Working Capital Adjustment The Ld. TPO/ Ld. DRP has erred in not considering the fact that the Appellant does not have any working capital risk, therefore, no negative working capital adjustment should be allowed. Reason for filing Additional Ground of Appeal The Appellant during the preparation of Form 36B has taken a generic ground on working capital adjustment. However, in order to bring clarity on the existing Ground No. 4.9, we are elaborating the ground for easier understanding of the issue at hand. On the above basis, we humbly request the Hon'ble bench members to not propose a negative working capital adjustment." 23. Ground No.1 is general in nature and with respect to ground No. 2, it was contended that this ground is covered by judgment of jurisdictional High Court in the case of Tata Elxsi Ltd., 349....
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....ing the ALP for the international transactions, the TPO has selected 10 comparables. On receipt of TPO order, the AO has prepared the draft assessment order against which assesse has filed the objections before the DRP. DRP has considered the objections filed by the assessee and having dealt with these objections, the DRP has excluded 2 comparables from the list of comparables, i.e., Accentia Technologies Ltd., and Informed Technologies and finally taken 8 comparables for determining the ALP. Out of these 8 comparables, the assessee has sought exclusion of Universal Print System Ltd., Infosys BPO Ltd., TCS E-serve Ltd., BNR Udyog Ltd., and Excel Infoways Ltd. Exclusion of Universal Print System, Infosys BPO and TCS Service Ltd., on the ground of functional dissimilarity. It was further contended that exclusion of these comparables were examined by the Tribunal in the case of Swiss Re Shared Services (India) Pvt. Ltd., (supra). 27. In support of his argument, the learned counsel for the assessee has filed a consolidated chart identifying the comparables of which exclusion/inclusion is sought for on different grounds. As per this chart, out of 8 comparables finally taken by the DR....
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.... adjusted mean margin of 29.85%. Accordingly, the TPO has proposed an adjustment u/s. 92CA of Rs. 11,67,33,647/-. The assessee challenged the action of the TPO before the DRP. The DRP has not accepted the objections of the assessee however suomoto rejected one company from the set of comparables on the ground of different business model. Thus the DRP has excluded M/s. Accentia Technologies Limited from the set of comparables. After the directions of the DRP, the final assessment order was passed by considering the nine comparable companies. Before the Tribunal, the assessee is seeking exclusion of six comparable companies out the nine companies from the set of comparables are as under: S.No. Company Name Turnover as per TP Order (in INR crores) 1. M/s. Universal Print Systems Limited (Segmental) 6.18 2. M/s. Informed Technologies India Limited 1.94 3. M/s. Infosys BPO Limited 1312.41 4. M/s. Microgenetic Systems Limited 1.30 5. M/s. TCS E-Serve Limited 1578.44 6. M/s. BNR Udyog Limited (Segmental) 1.47 2. The ld. AR of the assessee has submitted that the TPO has applied a turnover filter of less than one crore ....
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....nover is around Rs. 11 crores only. While making the selection of comparables, the turnover filter, in our opinion, has to be the basis for selection. A company having turnover of Rs. 11 crores cannot be compared with a company which is having turnover of Rs. 260 crores which is more than 23 times the turnover of the Assessee. This company cannot be regarded to be in equal size to the Assessee. We, accordingly, direct the AO to exclude this company out of the comparables. (ii) Infosys BPO Ltd. :- In this case also we noted the turnover in respect of this Company is Rs. 649.56 crores while the turnover of the Assessee company is around Rs. 11 crores which is much more than 65 times of the Assessee's turnover. We, therefore, do not find any illegality or infirmity in the order of CIT(A) in excluding this Company out of the comparables. Accordingly, we confirm the order of the CIT(A). (iii) Wipro Ltd.:- After hearing the rival submissions, we noted that the CIT(A) applying the turnover filter has excluded this company out of the comparables. The turnover reported in the case of Wipro Ltd. is Rs. 939.78 crores while in the case of the As....
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....stances of the case, we direct the AO / TPO to exclude the above mentioned six companies from the set of comparables." 30. In this order of the Tribunal, no discussion with respect to Excel Infoways Ltd., was at all made. This comparable was sought to be excluded on the ground of extra ordinary events and it fails the employee cost filter but details were not furnished during the course of hearing of appeal. Simply reliance of this order of Tribunal was placed with the submission that the exclusion of this comparable is covered by the order of the Tribunal in the case of Swiss Re Global Business Services India Pvt. Ltd., but we find no discussion in this regard in that order. Therefore, we find no merit in the assessee's contentions with regard to exclusion of this comparable. 31. So far as remaining 4 comparables i.e., Universal Print System Ltd., Infosys BPO Ltd., TCS E-serve Ltd., BNR Udyog Ltd., are concerned, we find that the comparables were excluded by the Tribunal on the ground of turnover filter which is not considered to be a good filter in the light of judgment of Hon'ble Delhi High Court in the case of Chryscapital Investment(supra), Therefore, we are of the view ....