TaxTMI 
TaxTMI 
2019 (6) TMI 588
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....n order is passed disposing these appeals. 2. The assessee has raised the following grounds of appeal in ITA No. 1025/Del/2016 for the Assessment Year 2011-12:- "1. The learned TPO /AO/DRP have erred in making an addition of INR 13,129,292 to the total income of the Appellant in respect of international transaction pertaining to provision of content support services and back office support services by the Appellant to its Associated Enterprises ("AEs") 2. The learned TPO/AO/DRP has erred by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income-tax Rules, 1962 ('the Rules'), and modifying the same for the determination of the Arm's Length Price ('ALP') of the impugned transaction to hold that the same are not at arm's length without returning a finding about existence of any of the circumstances specified in clauses (a) to (d) of sub-section (3) of section 92C of the Act. 3. The learned TPO/AO/DRP have erred in: a. Not accepting the use of multiple year data, as adopted by the Appellant in its Transfer Pricing ('TP') documentation; and b. Determining the arm's ....
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.... 76362835/-, provision of content support services of INR 86875893/- and provision of back-office support services of INR 30905966/-. The assessee benchmarked them adopting Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) and adopted profit level indicator ( PLI) of operating profit by total cost (OP/TC), selected 22 comparables, used multiple year data and found the average margin of those comparable at 10.72 %. The assessee's margins were 15% and therefore as per T P Study report the assessee contented that its international transactions are at arm's-length. 6. The ld TPO , While examining the provision of software development and support services international transactions amounting to INR 76362835/-, issued show cause notice stating that the filters, the comparable selected by the assessee found that they are not appropriate and therefore he carried out fresh search of the database and proposed 14 comparables. Subsequently, on comparable as well as their margins, assessee was given an opportunity to comment upon. After considering the same, learned transfer pricing officer reached a dataset of 16 comparables whose average profit level indicator of ....
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....) and (3) Coral Hub limited. 11. He immediately referred to the provisions of rule 10 B (3) of The Income Tax Rules and stated that any uncontrolled transactions shall be comparable to an international transaction, if none of the differences, if any, between the transactions being compared or between the enterprise entering into such transactions are likely to materially affect the prices are cost, charges paid in or the profit arising from such transaction in the open market or reasonably accurate adjustment can be made to eliminate the material effects of such differences. He also submitted that when judicial precedents for the same AY for ITeS segment decided the exclusion or inclusion of any comparable, than one does not have to go to the functional comparability and on principle basis, they should be considered for exclusion/inclusion based on that judicial precedents. He therefore requested that in case if any of the comparables challenged by the assessee for inclusion/ exclusion, if there are judicial precedents available, then it should be excluded/included, without looking at the functional comparability of the assessee with those comparables. He further referr....
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....in para number 5 of the order. If the argument of the ld AR is accepted, then it will result in to a situation, that if a comparable is excluded in one case, that particular comparable will always be excluded from transfer pricing database, irrespective of its identity of functionality. No such judicial precedents are drawn to our notice by the ld AR. Such is not also the mandate of the law. Merely on the basis of some judicial precedents without satisfying the basic condition of the complete identity of the functionality between the assessee and those persons in whose case, the judicial precedents are relied upon, no comparable can be included or excluded. It is also important to note here that the provisions of rule 10 B (2) clearly provides that the comparability of an international transactions with in uncontrolled transactions shall be judged with reference to:- (1) Specific characteristic of the property transferred or services provided, (2) Functions performed taking into account the assets employed or to be employed and the risk assumed by the respective parties to the transaction, (3) contractual terms of the transactions which laid down explicit....
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....l use by the AE, therefore the ultimate responsibility of the work undertaken by KIPL rests with the AE. ► Human resources KIPL undertakes the recruitment/ hiring process and is responsible for day-to-day supervision and control of its employees. It is also responsible for training of employees with suitable inputs from the AE. ► Quality control In respect of the aforementioned services, KIPL is responsible for ensuring that requisite quality/ performance standards are met while rendering services. KIPL would also ensure that the services are rendered as per the requirements laid out in the statement of work issued by the AE. In case the services are not as per the standards laid down by the AE, KIPL would re-work on the deliverables to align them with the group's standards. Therefore, the responsibility to maintain quality is jointly of KIPL and the AE. Briefly tabulated are the functions performed by KIPL and its AE in relation to provision of content support services by KIPL to its AE 4.3.3. Risk analysis Briefly summarised below are some of the key risks, faced by KIPL and its AE, in relation to provision of ....
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.... June 2005, with DF Institute Inc. pursuant to which, KIPL is responsible for providing back office support services to its AE. Summarised below is a brief analysis of the nature and terms of the identified international transaction: 4.4.2 Functional analysis Based on our discussions with KIPL, summarised below are the functions performed by KIPL and its AEs in relation to provision of back office support services by KIPL to its AE. ► Marketing and business development Being a captive unit, KIPL does not undertake any marketing or business development functions. All activities pertaining to solicitation of customers and development of business are performed by the AE itself. ► Project management KIPL is responsible for project management and the various services to be provided to the AE. Since it provides back office support services for internal use by the AE, therefore the ultimate responsibility of the work undertaken by KIPL rests with the AE. ► Human resources KIPL undertakes the recruitment/ hiring process and is responsible for day-to-day supervision and control of its employees. It is ....
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....t is also recoverable from the AE. Therefore, service liability risk along with re-work risk is not borne by KIPL. ► Credit and collection risk KIPL does not bear any credit and collection risk since it only invoices its AE. ► Foreign exchange risk KIPL invoices its AE for services in USD, which is different from its functional currency, INR. To that extent, KIPL is exposed to foreign exchange risk arising from any adverse movement in the exchange rate. Further, the functional currency of its AE is USD. Accordingly, it is not exposed to foreign exchange risk in this transaction. Briefly tabulated below are the risks, which are faced by KIPL and its AE in relation to provision of back office support services by KIPL to its AE. Type of risks KIPL AE Market risk No Yes Capacity utilisation risk No Yes Service liability risk No Yes Credit and collection risk No Yes Foreign exchange risk v e s ^ . No 4.5 Assets employed The assets employed by KIPL after depreciation (as on 31 March 2011) are as under:- Type of Assets Amount (INR) Improvement to Leasehold prope....
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....is evident from the description of the services given in the assesses agreement. Therefore the DRP classified the assessee as knowledge process outsourcing unit and based on that the functional, similar it of the comparable was examined 16. In above circumstances, 1st comparable challenge by the assessee is E Clerxs Services Limited. Assessee contested the same before the learned transfer pricing officer stating that it is functionally not comparable. The learned transfer pricing officer rejected the argument of the assessee stating that the services offered by this company in data analytical and processing are part and parcel of ITeS segment. He further referred to certain snapshots from the annual report of the company to show that it is an ITeS company which is in the same segment in which the assessee company is working. Such snapshots referred by the learned transfer pricing officer are with respect to the segment reporting and revenue recognition policy of that company. Accordingly, the learned transfer pricing officer held that the above company is retained as a suitable comparable. 17. The objections filed before the learned dispute resolution panel also did not meet ....
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....nd no i. (functionally different)] before TPO as is evident from the submission of the assessee before TPO appearing in assessee's paper book Vol-1, page no 335-389. All the grounds mentioned are new grounds being raised before ITAT. These should not be considered or it should be sent back to TPO for fresh consideration. He submitted that Assessee did not raise any of the grounds except functional dissimilarity, before DRP either. DRP considered the ground of Supernormal Profits. DRP also relied upon the judgments of Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors and in the case of Ramp green Solutions Pvt Ltd Vs CIT (2015-TIl-33-HCDel- TP) and held that assessee failed to establish that the comparables with high profit margins are functionally very different so as to render them unsuitable even for TNMM comparison and that TPO had given valid reasons for his decision. Considering the above, DRP held that super profit companies can be taken as comparable (page 14 of DRP order). he submitted that It is trite law that the assessee should submit all the evidences and should take all the grounds at the first opportunity (before TPO, in this case) itsel....
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....pectively. Besides these risks, the assessee being a captive service provider has huge risk in the nature of 'single customer risk' and this risk doesn't get eliminated just by getting assured remuneration at cost plus model from the only customer(AE). if the AE fails or for any reason doesn't get business or doesn't give work to the assessee in India, not only this assured return loses its significance but leaves the assessee with zero business. Thus assessee has huge business and market risk. Besides, the assessee also assumes common risks such as capital risk, asset risk, regulatory risk, law and order related risk and other business risks etc. Therefore, it cannot be held that the assessee is risk-insulated entity. c. Supernormal profit: The entire exercise of determination of ALP by using TNMM seeks to determine the profit that comparable uncontrolled enterprises would make. Therefore, supernormal profit cannot be a criteria for elimination of any comparable as held by Hon'ble Delhi High Court in the case of in the case of Chryscapita! Investment Advisors and in the case of Rampgreen Solutions Pvt Ltd Vs CIT (2Q15-TI!-33-HC-Del-TP) unless the a....
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....ry remote in the backdrop of such an increase in number of in-house employees and employee cost. iii. It may be noted from Page 67 of Paper Book Vol-ll that the subhead 'contract for services' has been classified by e clerx itself under the broad head 'L' 'general and administrative expenses' and not under the head 'K' which captures 'employee compensation and related expenses'. Therefore, it is clear that the sub-head 'contract for services' is related to 'general and administrative expenses' and not to 'employee compensation and related expenses' unless we hazard a highly unsafe presumption that the company had erroneously put this subhead under 'wrong' broad-head despite availability of appropriate head. iv. There is nothing in the annual report to suggest that the subhead 'contract for services' was related to outsourcing of work in relation to services rendered to its AEs. The probability of outsourcing by e Clerx, which itself is a KPO and gets to do the work outsourced by its clients on the strength of its competent and professional employees, is close to zero. No client makes p....
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....e learned dispute resolution panel has held that it is a high-end KPO. Admittedly there is no challenge to the functional profile stated by the learned dispute resolution panel. Admittedly the coordinate bench in B C Management Services (P) Ltd vs Deputy Commissioner Of Income Tax (2017) 83 taxmann.com 346 (Delhi) (Tribunal) dated 25/05/2017 has held as under:- "12. However without entering into the semantics of arguments as to what kind of functions constitutes lowend ITeS service provider or high-end ITeS or KPO service provider, we would like to confine our finding on FAR analysis. Because, at times when host of services are performed under ITeS, likes of assessees', there becomes very thin line distinction between functions performed by the low-end ITeS service provider and high-end ITeS service provider and it is quite difficult to analyse in such situations as to how much value additions are there in deliverables in rendering of such kind of host of services. At the outset, on a perusal of the Financials and annual report of E-clerx for the relevant financial year as pointed out to us during the course of the hearing, we find that the E-clerx has outsourced most ....
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....see does not have an outsourcing model but the comparable company has outsourcing model, then they are not comparable. We fully agree with the ratio laid down by the coordinate bench. However ld DR has raised serious arguments on the issue that above comparable has no outsourcing activities by referring to various pages of the annual report of the comparable company, therefore we are duty bound to examine these facts. we have also analyzed the annual report of the comparable company and also requested the learned authorised representative to show us that how the comparable company is stated to be engaged in outsourcing model. The learned authorised representative merely made the reference to the coordinate bench decision and also the general administrative expenditure of the comparable company. On careful analysis of the decision of the coordinate bench, it is apparent that it appeared to the bench that major operations of the comparable company are based on outsourcing model. We are also conscious of the fact that the decision of the coordinate bench has made an observation on the functionality of the comparable. It is also clear on reading para number 12 of the order of the coord....
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....he comparable under the head contract for services of Rs. 437,150,000 is not outsourcing charges but various charges paid to its related parties for different services. In the complete annual report for the relevant financial year examined by us, There is no mention of any outsourcing model employed by the comparable company. Contrary to that in the Management Discussion And Analysis, It is apparent that comparable company is hugely relying on its human resource assets. On looking at the functional profile of the comparable company also where it is engaged in a specialized activity, It is highly unusual that it is engaged in providing services to its clients through outsourcing model. Therefore, now the dilemma before us is how to resolve the dispute between the assessee and the revenue where assessee contends that company is carrying on business through outsourcing model and revenue refutes the above argument. The assessee is relying upon a judicial precedent of the coordinate bench of equal strength and very forcefully argues that this coordinate bench is bound to follow the above decision and cannot sit into the correctness of the judgment now, revenue relies upon the annual acc....
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....e assessee regarding the identity, genuineness and financial capacities of the parties made the addition of the amount. On appeal the Commissioner appeals deleted the addition and the tribunal restore the matter back to the file of the assessing officer holding that the ends of the justice would be to fresh innings were given to the assessing officer to cross examine the creditors in the light of the statements and affidavits and other evidences on record. It is apparent that in the present case the learned dispute resolution panel has categorically noted that the assessee has not given the complete agreements. Further the assessee has raised the new argument which was not raised before the lower authorities for exclusion of the above comparable. Additionally the assessee is contending that comparable is carrying on outsourcing model business which is not justified from the financial records and annual reports produced by the assessee before us. In view of these facts it is in the interest of the assessee that it may be examined by the learned assessing officer by issue of notice u/s 133 (6) of the act that whether the comparable company is carrying on an outsourcing business model....
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....ct that the comparable company belongs to an Infosys group, has incurred the expenditure on the brand building and on the annual report itself shows the imprint of being part of the large IT segment group, it is apparent that the functional profile, the assets utilized by the comparable company are not comparable with the assessee company. Therefore, for this reason only, we direct the learned transfer pricing officer, AO to exclude the above comparable from comparability analysis. 29. The next comparable contested by the assessee is the exclusion of TCS E serve limited on the ground that this company is performing though ITeS services however it has a brand behind it and therefore the same is not comparable with the assessee. In nutshell assessee challenged that this comparable is required to be excluded for the brand value of the TCS and functional the similarities. The assessee challenged its exclusion for the reason of the functional dissimilarity as the comparable companies engaged in transaction processing and technical services like software testing, verification and validation of the software. 30. The learned authorised representative also challenged it has it owns in....
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....ntent development and high end value added services being provided by the assessee. In view of the above, the order of the AO should be upheld and appeal of the assessee be dismissed. 35. On careful analysis of the arguments of the both the parties we found that the assessee has enclosed the annual report for financial year 2011 at page number 388 - 399 of the paper book. The learned TPO has considered the ANP at para number 10 of his order. He has rejected the comparable selected by the assessee stating that the appropriateness of filters and arguments in favour of high turnover and abnormal margins has already been discussed earlier and then he proceeded to discuss the arguments of the assessee against rejection and inclusion of the comparables. On careful analysis of the determination of a LP of this segment we find that the learned transfer pricing officer has not discussed at all why he is excluding the comparable selected by the assessee. The learned DRP vide para number 5.3 of his order has rejected the objection of the assessee with respect to inclusion of the comparables stating that all these comparable selected by the assessee and rejected by the learned TPO have been....
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....ilable. Unavailabaility of segmental information coupled with different accounting year ending makes it impossible to reliably work out PLI of ITES segment separately. With respect to Significant RPT he referred to Page 98-99 of the annual report reveals that the company had significant related party transactions (RPT) during the year. He also submitted that R System is no at captive service provider submitting that this company is not a captive service provider (unlike assessee). It provides its services from several centres spread across the globe.he refeered to Page 5 of the annual report gives global footprint of the company which is much wider than assessee. As per page no 14 of the annual report, the company has 13 delivery centres spread from west coast of America to Singapore in Asia Pacific Region. Thus the market risk, geographical risk, foreign exchange risk and human resource risk and the cost of providing the services are vastly different from the assessee. In the end he submitted that assessee is seeking inclusion of this comparable; therefore the primary onus was on him to establish its functional comparability by filing relevant documents to establish comparability,....
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.... ( page 129 paper book 1 for AY 2012-13). This company has taken up sale of goods( around 75% of revenue) as its primary business during this year(Page 459, 452 of PB-II). Therefore, it has lost its character as BPO in this year. Revenue from ITES is only 20% approximately. This company has huge Intellectual property, goodwill and technical know how (Page 456 of PBII). Huge RPT: This company appears to have huge related party transactions (page 479 of PB II). Alternatively, the related party transactions are not given (page 463 of PBII) As seen from chart of AR, this company is functionally different. Therefore, its not a suitable comparable. 43. We have carefully considered the above contentions. This comparable selected by the assessee and therefore the assessee is directed to submit the copy of the annual report of the relevant data from the database to the learned transfer pricing officer. Further there is also a fact that this comparable is found to be functionally dissimilar to assessee by assessee itself as per argument of the ld DR. Therefore The learned TPO is directed to include the above company in the comparability analysis if it is functionally similar and crosses a....
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....Act. 3. The learned TPO / AO / DRP have erred in: a. Not accepting the use of multiple year data, as adopted by the Appellant in its Transfer Pricing ('TP') documentation; and b. Determining the arm's length margins / prices using data pertaining only to financial Year ('FY') 2011-12 which was not available to the Appellant at the time of complying with the Indian TP documentation requirements. 4. The learned TPO / AO / DRP have erred in rejecting certain comparable companies selected by the Appellant by applying inappropriate comparability criteria such as : a. Turnover less than INR 1 crore; b. Export turnover less than 75 percent of operating revenues; c. Different accounting year; and d. Employee cost less than 25 percent of operating cost 5. The learned TPO / AO / DRP have erred in erroneously rejecting the comparable companies selected by the Appellant and adding certain companies to the final set of comparable companies on an ad-hoc basis, thereby resorting to cherry picking of comparables to determine the ALP of the impugned transaction. 6. The learned TPO/AO/DRP have erred in selectin....
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....red to the decision of Inductis India private limited in ITA number 01/02/2003/del/2017 for assessment year 2012 - 13 dated 20/8/2018 wherein for assessment year 2012 - 13. 53. The learned the learned departmental representative vehemently objected to the submission of the assessee and supported the orders of the lower authorities. 54. On careful consideration of the annual report of the above comparable company it is stated that the comparable company provides healthcare and receivable management services involving medical transcription, medical coding, billing and receivables management (collections). In the annual Report description of the medical transcription services have been provided with 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 rigorous training as it involves the identifying the generic name and trade name of the various drugs. That can be done only after reference to the pharmacology reference books which should always be a part of the library of a medical transcription....
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.... allowed with above directions. 57. Ground number 9 assessee has challenged the initiation of proceedings u/s 271 (1) ( C ) of the act, in ground number 10 the assessee has challenged that the learned AO has not granted proper relief in accordance with the direction of the DRP and in ground number 11 the assessee has challenged for granting of the MAT credit. 58. We have carefully considered the argument of the learned authorised representative and the learned senior departmental representative and found that ground number 9 is premature and therefore same is dismissed. 59. Adjudicating ground number 10 we direct the learned AO/TPO grant the proper relief as directed by the ld learned dispute resolution panel to the assessee as it binds him. However it was not made available to us that what are those concessions, relief which has not been granted by the TPO/ AO. We direct the assessee to submit details of those concessions and relief, TPO is directed to examine the same and then decide it on merit and grant relief to the assessee. 60. With respect to ground number 11 we direct the learned assessing officer to grant the proper minimum alternate tax credit available to th....