TaxTMI 
TaxTMI 
2019 (5) TMI 737
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....e draft of the proposed assessment passed by the learned AO wherein adjustment proposed by The Additional Commissioner Of Income Tax, Transfer Pricing, Chandigarh [ The Ld TPO] as per order passed u/s 92CA (3) of the act dated 24/1/2014 the adjustment of INR 1 5891990/- was proposed to the international transaction of INR 1 38558316/- was incorporated. 2. The assessee has raised the following grounds of appeal in ITA No. 1671/Del/2015 for the Assessment Year 2010-11:- "1. The assessment order passed by the Learned Assessing Officer ('Ld. AO') pursuant to the directions of Learned Dispute Resolution Panel ('Ld. DRP') based on the facts and in the circumstance of the case is bad in law and void ab-initio. 2. The Ld. DRP and the Ld. Transfer Pricing Officer ('Ld. TPO') / Ld. AO (following the directions of the Ld. DRP), erred both on facts and in law in confirming the addition to the extent of Rs. 1,42,83,265 holding that the international transactions pertaining to provision of routine IT enabled services do not satisfy the arm's length principle envisaged under the Act and in doing so have grossly erred by: 2.1 not finding any merit in the objections of....
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....rding judicial pronouncements on the issue); 2.7 including certain companies that are not comparable to the Appellant in terms of functions performed, assets employed and risks assumed; 2.8 including certain companies in the comparables' set that had achieved supernormal growth as a result of extraordinary circumstances during the year, thereby incorrectly comparing such companies to the Appellant which operates as a captive services provider and has stable growth under normal circumstances; 2.9 excluding certain companies on arbitrary/ frivolous grounds even though they are comparable to the Appellant in terms of functions performed, assets employed and risks assumed; 2.10 ignoring the business/ commercial reality that since the Appellant is remunerated on an a cost plus basis, (i.e. it is compensated for all its operating costs plus a preagreed mark-up) the Appellant undertakes minimal business risks as against comparable companies that are full-fledged risk taking entrepreneurs, and by not allowing a risk adjustment to the Appellant on account of this fact; 2.11 not providing for working capital adjustment claimed by the Assessee and ....
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.... search using Prowess and capitaline databases selecting 10 comparables whose weighted average of profit level indicator was 11.85 percentage by considering multiple year data. The TPO asked the assessee to submit the updated margins using only the data for financial year 2009 - 10. Assessee submitted the same where the average PLI of operating profit to operating cost of all these 10 comparables was calculated at 5.3% against the assessee's own profit level indicator of 12%. The learned transfer pricing officer further verified the accept/reject metrics of the assessee and noted that vertical of the IT enabled industry was not a criteria for rejection/acceptance of a company as a comparable. Therefore he noted that the companies engaged in IT enabled services were treated as comparables irrespective of the verticals that is the industry to which it caters, horizontal verticals such as functions like back-office operations, medical transcription et cetera. He accepted the transactional net margin method as the most appropriate method selected by the assessee. He therefore on examination of the transfer pricing study report found that it has several defects, further the comparabl....
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....y relied upon the several judicial precedents wherein four out of those 5 comparables have been excluded from the comparability analysis in case of some other assesses. Therefore he submitted that those comparables should also be excluded from the comparability analysis in case of the international transactions of the assessee also. We will deal with each of the comparable independently looking into their functionality and comparing it with the functionality of the assessee. 8. The learned departmental representative also vehemently objected to the argument of the authorised representative that those 5 comparables should be excluded on the basis of the judicial precedents rendered in some other cases. He vehemently submitted that mandate of rule 10 B provides for comparability analysis with the functions of the assessee of those comparable companies. Unless the assessee demonstrates with adequate documentation that the companies in whose case these comparables are excluded is having the same functional profile as that of the assessee. He otherwise referred to the order of the learned transfer pricing officer and the learned dispute resolution panel and stated that all the object....
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....t underwriting model, preparation of the asset summary et cetera. d. The research activities include carrying out extensive web searches on industry benchmarks, other information/better relating to markets, customize transaction surveillance and report generations thereof. e. In underwriting support the assessee carries on activities like entry of financial and other data of the client into Excel-based financial models developed by Alex US undertaking activities like data entry, database document management and related web research for assisting in preparing credit which database conducting estoppels reviews et cetera f. fixed income advisory and analytics services includes comprehensive investment due diligence and survival and services for CMS investors by utilizing the data analytics and sound realistic judgment, investors can make seed MBS investments with confidence. Additional clients include CTO originators/managers commercial and investment banks bond insurance firms and hedge funds. g. In financial administration the activities included the full services accounting, investment fund administration, transaction processing, valuation review....
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....ysis and has undergone the extraordinary events during the year in the form of amalgamation. It is further stated that this company was found to be functionally dissimilar by the coordinate bench in the assessee's own case for assessment year 2008 - 09, wherein it is found that extraordinary events have taken place during the year in the case of the above comparable. The learned authorised representative relied upon the plethora of judicial precedents where in case of some other functionally different assessee this comparable is excluded. 11. The learned transfer pricing officer considered the argument of the assessee that it is functionally dissimilar and rejected that stating that annual report has been produced and it is seen that the company is into an healthcare receivable cycle management predominantly which is an ITeS segment. He further held that 86% of the receipt is from healthcare receivable field and a small portion is in the coding activity. He thereafter extracted the annual accounts and the reports of the above comparable company and stated that healthcare management receivable system is of one single operational segment consisting of various activities which are ....
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....and liability of the erstwhile company was transferred invested in this company with effect from 01/04/2008. On reading the above note it is apparently clear that amalgamation has happened with effect from 01/04/2008, and therefore it does not pertain to this year which is assessment year 2010 - 11 (FY 2009-10). There is no financial impact on the profitability / price of the comparable company shown to us. Therefore we reject the argument that there is an extraordinary event in the comparable company. 15. On careful consideration of the annual report of the above comparable company for financial year 2009 - 10 placed, at page number 41 of the annual report it is stated that the comparable company provides healthcare and receivable management services involving medical transcription, medical coding, billing and receivables management (collections). At page number 42, description of the medical transcription services have been provided which shows brief process of the medical transcription giving the process flowchart and in the end it is stated that medical transcription profession is considered very much a skilled work which can be done only after undergoing 6 to 8 months of....
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....see. Further it was stated that the presence of the brand value has not been shown to have made any impact on the profitability of this company and therefore same cannot be excluded. The learned dispute resolution panel also affirmed the finding of the learned transfer pricing officer. 18. We have carefully considered the annual report of Infosys BPO Ltd for financial 2009 - 10 placed at page number 213 - 296 of the paper book. Undoubtedly the comparable company belongs to Infosys group and therefore it has the support and backing of the Infosys brand which will have its own impact on the profitability and price of this comparable company. It is also not necessary that the comparable company must have spent for the brand value. In the present case of comparable is not required to do so as it belongs to as such one of the largest group in the IT segment "Infosys". As per page number 281 in schedule 12 selling and marketing expenses shows that comparable company has spent approximately INR 7,500,000 towards the brand building and advertisement expenditure. Coupled with the fact that the comparable company belongs to Infosys group, has incurred the expenditure on the brand build....
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.... segmental information and further the comparable company enjoys the Tata brand and is contributing significantly by payment thereof. 23. We have carefully considered the contentions and find the annual Report of the above comparable company placed at page number 297 - 371 of the paper book. Apparently TCS E serve international is a subsidiary of Tata consultancy services Ltd. Behind the above comparable company, there is a 'Tata brand', which is almost 10 times bigger than Infosys brand ( on market cap basis) . On the perusal of schedule M of the profit and loss account there is a payment of 3738'000s towards the Tata brand equity contribution. For this reason that it belongs to Tata group and has also contributed to Tata brand which is one of the largest brand in the information technology segment, there is a definite impact on the pricing capacity of the comparable which the assessee lacks. Hence, we find that TCS E serve international Ltd deserves to be excluded. Accordingly we direct the learned TPO - AO to exclude the above comparable. 24. The 4th comparable that challenge by the assessee is TCS E serve limited stating that it is functionally dissimilar engaged in the t....
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.... (KPO) and the product company. 28. We have carefully considered the contention of the assessee as well as the orders of the learned TPO and dispute resolution panel. The assessee has submitted the copies of the annual accounts of the above company placed at page number 1 - 34 of the paper book. We have also considered the order of the coordinate bench in ITA number 1478/del/2015 at para number 3 at page number 17 where above comparable company has been excluded from the comparability analysis. We find that the facts before us are quite distinct as we do not find any reference in the order of the coordinate bench that how the assessee is engaged into a software development activity. Even otherwise the coordinate bench considered that this comparable is functionally dissimilar to the Bechtel however it never held that it is functionally dissimilar to this assessee. Hence, reliance on that decision deserves to be rejected. 29. On analysis of note number 1.1 of schedule 1 being significant accounting policies of schedule to the financial statements it is apparent that this company is primarily engaged in the business of providing healthcare outsourcing services for the healthcar....
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....difference in the margins earned by the assessee and the other comparables. The learned dispute resolution panel also considered this argument of the assessee vides ground number 11 and 12. Even before us, assessee has only relied upon the submissions made before the learned dispute resolution panel for allowability of the working capital adjustment, however, it did not provide any working of the same. In view of the absence of proper working and the reasons given by the assessee before the lower authorities or before us, we do not find any reason to accept the contention of the learned authorised representative. Therefore we reject the argument of the working capital adjustment while computing the margins. 31. Accordingly ground number 2 of the appeal of the assessee is partly allowed. 32. Ground number 3 of the appeal is with respect to the judicial decisions on the transfer pricing adjustment not followed by the lower authorities. No specific arguments were advanced before us. Even otherwise the comparability analysis is a complete factual analysis and therefore any comparable which is held to be not comparable for consideration in case of any other assessee cannot be held....
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....the directions of the Ld. DRP), erred both on facts and in law in confirming the addition to the extent of INR 27,848,043 holding that the international transactions pertaining to provision of low risk IT enabled services do not satisfy the arm's length principle envisaged under the Act and in doing so have grossly erred by: 2.1 not finding any merit in the objections of the Appellant that none of the conditions set out in section 920(3) of the Act are satisfied in the present case; 2.2 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 disregarding the arm's length price ('ALP') as determined by the Appellant in the TP documentation; 2.3 disregarding the fact that the Appellant is a captive IT enabled service provider which does not bear substantial risks associated with its functions and therefore cannot be compared to full-fledged entrepreneur service providers; 2.4 erred in using comparable company data available at the time of assessment proceedings, instead of using data available at the time of preparing the TP documentation. ....
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....anies to the Appellant which operates as a captive services provider and has stable growth under normal circumstances; 2.10 excluding certain companies on arbitrary/ frivolous grounds even though they are comparable to the Appellant in terms of functions performed, assets employed and risks assumed; 2.11 ignoring the business/ commercial reality that since the Appellant is remunerated on an a cost plus basis, (i.e. it is compensated for all its operating costs plus a pre-agreed mark-up) the Appellant undertakes minimal business risks as against comparable companies that are full-fledged risk taking entrepreneurs, and by not allowing a risk adjustment to the Appellant on account of this fact. 3. The Ld. TPO/ Ld. AO/ Ld. DRP have grossly erred on facts and in law by disregarding judicial pronouncements in India in undertaking the TP adjustment. 4. The Ld. AO/Ld. TPO/Ld. DRP have erred in enhancing the income of the Assessee by INR 480,861 by incorrectly applying an interest rate of LIBOR plus 400 basis points for the period of delay in the realization of receivables from associated enterprise ('AE') beyond 30 days. 5. The Ld. TPO/ Ld. AO /....
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....E serve limited d. Infosys BPO Ltd 42. The arguments of the both the parties with respect to the exclusion of above comparables remained the same as were advanced for assessment year 2000 - 11. The only new comparable which assessee is seeking for exclusion is Eclrex services Ltd. 43. We have carefully considered the rival contentions and perused the orders of the lower authorities. On comparison of the functions performed by the assessee as well as the functions performed by the comparable companies, discussion made by us in the order of the assessee for assessment year 2010 - 11, we direct the learned transfer pricing officer to exclude (1) Accentia technologies Ltd, (2) TCS E serve limited, (3) Infosys BPO Ltd for reason given by us therein. 44. Now we come to the new comparable E clrex services Ltd, which assessee contest for exclusion stating that it is functionally dissimilar as it is engaged in rendering knowledge process services focused on financial services and sales and marketing support services. Therefore the contention of the learned authorised representative is that it is KPO which cannot be compared with the functions of the assessee. It was sub....