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2017 (8) TMI 1557
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....uently, the assessee revised its return of income on 27.03.2014 declaring total income of Rs. 19,95,75,120/-. The Assessing Officer referred the matter to the TPO for determining the arm's length price in respect of the international transactions entered into by the assessee as per the provisions of section 92CA(3) of the I.T. Act. In response to notice u/s. 92CA(2), the assessee furnished various details. The TPO observed that the assessee has reported the following international transactions in the Form No. 3CEB :- S. No. International Transaction Amount in INR 1 Purchase of raw material 546730531 2 Sale of goods 612259008 3 Payment of royalty 64377766 4 Availing of services 7534649 5 Purchase of finished goods 1123924565 6 Provision of services 16210677 7 Provision of services (ITES) 10782582 8 Purchase of spare parts and fixed assets 113506642 9 Interest on loan 13561735 10 Networking charges 23727954 11 Cost recharge paid/payable 10908058 12 Cost recharge received/receivable 24602285 3. The TPO issued a show cause notice asking the assessee to justify the....
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....to the TPO for computation of the arm's length price, as is required under section 92CA(1) of the Act. Provision of IT Enabled Services ("ITes") Segment 3. That on facts and in the circumstances of the case and in law, DRP/AO/TPO erred in making an adjustment of Rs. 1,32,19,445/- to the returned income of the Appellant by re-computing the arm's length price of the international transactions with its associated enterprises in the ITeS segment by: 3.1 Accepting additional/modified filters selected by TPO in the ITeS segment which lacked valid and sufficient reasons. 3.2 Disregarding the economic and comparability analysis as conducted by the Appellant in the Transfer Pricing documentation ("TP documentation") maintained by it in terms of section 92D of the Act and in rejecting appropriate comparable companies selected by the Appellant and in accepting comparable companies that are functionally not comparable. 3.3 Selecting certain companies which had significantly high turnover and/or were not comparable by way of functions, assets and risks in order to determine the arm's length ....
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....cial Valuation Board Order and that arm's length price accepted by one Governmental authority cannot be disregarded by the other Governmental authority. 8. That on facts and in the circumstances of the case and in law, the DRP/AO/TPO erred in not providing any comparable data to hold the arm's length value of the purchases of fixed assets to be "nil". 9. That DRP/AO/TPO erred on the facts and in the circumstances of the case and in law, in charging and computing the interest on demand under section 234B and 234C of the Act and withdrawing interest under section 244A of the Act. 10. That DRP/AO/TPO erred on the facts and in the circumstances of the case and in law, in initiating penalty proceedings under section 274 read with 271(1)(c) of the Act. The above grounds of appeal are mutually exclusive and without prejudice to each other. The Appellant craves leave to add, alter, amend or vary any of the above grounds either before or at the time of hearing as we may be advised.' 6. The assessee has also taken an additional ground which reads as under :- "Ground No. 11 - Without prejudice to othe....
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....ies Ltd. 11.95 4 Eclerx Services Ltd. 58.4 5 Infosys BPO Ltd. 36.75 6 TCS E-Serve Ltd. 63.69 7 Excel Infoways Ltd. (seg.) 41.48 8 E4e Healthcare Services Pvt. Ltd. 19.85 9 Acropetal Technologies Ltd. (segment) 9.21 Average 27.65 11. Referring to page 7-8 of the order of Assessing Officer, he submitted that the DRP had directed the TPO/Assessing Officer to exclude Accentia Technologies Ltd. and Eclerx Services Ltd. and retained the remaining 7 comparables. He submitted that after giving effect to the order of the DRP, the mark-up comes to 22.26% as against 27.65% mark-up determined by the Assessing Officer/TPO. He submitted that mark-up of the assessee for the impugned assessment year was 10.00%. Ld. counsel for the assessee submitted that as Baxter India is engaged in providing human resource related services, payroll processing services, training and performance system data entry, etc. to its AE, its services can be termed as routine ITES services. He submitted that the sales turnover of ITES segment for financial year 2011-12 is Rs. 11.86 crores. This comprised only 2.65% of total turnover of Baxter India....
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....ther, the segmental information between ITES and software development services are not available. The company has presence of brand and the services are provided pre-dominantly to Citi Group company. So far as the employee base is concerned, TCS e-Serve Ltd. has more than 296 times of that of the assessee's employee base. The turnover is greater than 133 times of the assessee. Incomparable size of operations, abnormal profitability trend and super normal profits are the other grounds for rejection of TCS e-Serve Ltd. as a comparable. He submitted that this company was examined by the Delhi Bench of the Tribunal in assessee's own case in ITA No. 345/Del/2016 and company was excluded from the list of comparables while computing the average margin of comparables. 14.1 Referring to the decision of the Bangalore Bench of the Tribunal in the case of Swiss Re Global Business Solutions India (P.) Ltd. v. Dy. CIT [IT (TP) Appeal No. 2315 (Bang.) of 2016, dated 13-4-2017] for the assessment year 2012-13, he submitted that the Tribunal had directed the Assessing Officer/TPO to exclude TCS e-Serve Ltd. from the list of comparables on account of high turnover. 15. Referring to the....
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....lar view has also been taken by the Mumbai Bench of the Tribunal in the case of Maersk Global Service Centers (India) (P.) Ltd. v. ITO [IT Appeal No. 1082 (Mum.) of 2015, dated 29-7-2016] for assessment year 2010-11. This company was directed to be excluded on the ground that this belongs to Infosys Group thereby carries the goodwill and brand value of the group and it has got high turnover, apart from being functionally different from that company. He accordingly requested that Infosys BPO Ltd. should be rejected. 17. So far as Excel Infoways Ltd. is concerned, he submitted that the TPO rejected the contention of the assessee on the ground that the company is not meeting employee cost to sales filter of less than 25%. He submitted that this company fails to pass TPO's own filter of diminishing revenue and abnormal volatility in revenue and margins. It has got super normal profits. Referring to the decision of Mumbai Bench of the Tribunal in the case of Dy. CIT v. Willis Processing Services India (P.) Ltd. [IT Appeal No. 2125 (Mum.) of 2014], he submitted that Excel Infoways Ltd. was excluded on account of supernormal profits. Further, it fails employee cost to sales filter ....
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.... Ltd. and inclusion of R System International Ltd. 21. So far as exclusion of TCS e-Serve Ltd. is concerned, we find this issue had came up before the Tribunal in assessee's own case in the immediately preceding assessment year. The Tribunal in ITA No. 345/Del/2016 order dated 26.10.2016 for assessment year 2011-12 had directed to the exclusion of TCS e-Serve Ltd. from the list of comparables by observing as under :- '18. We have considered the submissions of both the parties. It is not disputed that TCSe-Service was engaged, inter alia, in software development services and the segmental details between ITEs and SDS were not there in the annual report. Moreover, from the annual report it is evident that its brand value also was considerable, which added to it profitability substantially. As compared to this, assessee was rendering only human resource services to its AE, on which profit margin derived by it was quite reasonable. Further, we find that in the case of Actis Global Services Pvt. Ltd. (ITA no. 6175/Del/2015 for AY 2011-12, ITAT observed in regard to TCS-E-Serve Ltd., as under: "22. Before us, the td. A; submitted that this company....
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....oordination, remote configuration and implementation of quality customer networking solutions. The assessee primarily undertakes to provide services for European and the Indian asset management company based in Mumbai. The assessee is primarily catering to the retail site (individual investor) to Fidelity Group business. Thus, broadly the functions performed by assessee are similar to that of Equant Solutions India Pvt. Ltd. (supra) and, therefore, this company deserves to be excluded. We find that functions performed by TCS-e-Serve Ltd. included rendering of technical services like software testing etc., which required skilled persons. As far as the objection regarding related party transaction is concerned, we are in agreement with the reasoning given by ORP that since this company was taken over by TCS group, therefore, there was no question of any separate details being given about related party transaction. However, keeping in view the various factors, pointed out by Id. counsel for the assessee, which we have noted earlier, this company cannot be taken as a comparable to the tested party." 20. Therefore, we are in agreement with the submission of ld. counsel that TCS....
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....24. So far as exclusion of Excel Infoways Ltd. is concerned, we also find merit in the submissions of the ld. counsel for the assessee that the above company should be excluded from the list of comparables. This company fails TPO's own filter of diminishing revenue and abnormal volatility in revenue and margins. We find from the order of the TPO at para 7.5 (page 24 - 25 of the TPO order) where the TPO has observed that the department has applied consistent diminishing revenue/loss making filter wherein the companies with losses/diminishing revenue for the last three years upto and including the financial year 2010-11 were rejected as comparables. The department has excluded such companies with consistent losses/diminishing revenue in an environment where Indian economy is growing at consistent rate. Having held so, the Assessing Officer included Excel Infoways Ltd. as a comparable without considering the fact that the said company does not pass the diminishing revenue filter. From the submissions of the assessee before the TPO (at page 232 of Volume - I of the Paper Book) we find the details of the operating margin of the company from financial years 2009-10 to 201-15 are as u....
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....8/[2015] 152 ITD 158 (Delhi) has held that a company should be rejected as comparable in case there is contradiction in the facts or data sourced from annual report and as per the information gathered u/s. 133(6). In view of above discussion, we hold that Excel Infoways Ltd. cannot be considered as comparable and should be excluded from the list of comparables. We hold and direct accordingly. 26. So far as the inclusion of R System International Limited is concerned, we find the TPO rejected the same on the ground that it has got different financial year ending. However, from the submission of the ld. counsel for the assessee before the TPO/DRP we find that audited quarterly results of the comparable company are available and the margin of the relevant financial year was calculated. Since the above company is functionally comparable, clears all filters of the assessee and PLI for year ending March 2012 has been computed, therefore, merely because the above company is following different financial year, the same cannot be a ground to reject the said company from the list of comparables. 27. We find identical issue had came up before the Hon'ble Delhi High Court in the case....
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.... DRP that affirmed it. The view taken by the Tribunal commends itself to us. It is not the financial year per se that is relevant. Even if the financial years of the assessee and of another enterprise are different, it would make no difference. If it is possible to determine the value of the transactions during the corresponding periods, the purpose of comparables would be served. The question in each case is whether despite the financial years of the assessee and of the other enterprise being different, the financials of the corresponding period of each of them are available. If they are, the TPO must refer to the corresponding period of both the entities in determining whether the two are comparable or not for the purpose of determining the ALP. 29. As noted by the Tribunal, the audit accounts of R System International Ltd. for the year ending 31.12.2008 had been given under one column and the data for the quarter ending 31.03.2009 and 31.03.2008 (both audited) had been given in two other columns. Thus, as rightly held by the Tribunal, if from the yearly data ending 31.12.2008, the results of the quarter ending 31.03.2008 are excluded and if the results for the quarter e....
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....ich is placed in the Paper Book and, therefore, the purchase of fixed assets are at arm's length under the Indian TP Regulations. He submitted that the valuation reports submitted cover 100% of the fixed assets purchased to the tune of Rs. 11,35,06,342/-, the details of which are placed at page 334 of Volume - I of Paper Book. The above amount consist of two parts i.e. (a) Rs. 3,95,46,512/- on which no mark has been charged and (b) mark up of 10% has been charged by the AE on purchase of fixed assets amounting to Rs. 7,39,60,130/-. He submitted that as per the benchmarking analysis submitted before ld. TPO/DRP the average OP/OC (three years) earned by independent overseas comparable manufacturing companies is 13.63%. Since the AEs have charged a lower mark-up than the comparable companies, therefore, the transaction is at arm's length. Referring to page 659 of Volume - I of Paper Book, he submitted that SVB order evidencing the arm's length nature of import of goods was submitted to the TPO/DRP. Further, during the financial year 2011-12 fixed assets to the tune of Rs. 1,80,20,576/- has only been capitalized. These comprise only 16.19% of the total assets purchased duri....
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....as this fact was not coming out from the records. The assessee has filed a certificate dated 19.9.2016, which is reproduced hereunder, wherein it is, inter alia, stated that the transaction price included 10% mark up on the cost. "TO WHOMSOEVER IT MAY CONCERN Dated 19th Sep'16 Subject: Valuation of import of capital asset~ from SAPA Prodotti Plastici SAGL, Switzerland Dear Sir This is to certify that the following capital assets have been imported from SAPA Prodotti Plastici SAGL, Switzerland by Baxter {India} Private Limited during Financial Year 2010-11. The transaction price included 10% mark-up on the cost. It is to certify that there was no double mark-up. Sr No Description of capital assets Date of Transaction Amount in CHF 1 RF Machine 31 Dec. 2010 1,334,888 2 RF Machine 31 Dec 2010 1,334,888 There are no remittances to SAPA Prodotti Plastici SAGL, Switzerland with regards to the imported capital assets over and above the above value. Further, Baxter India Private Limited has not purchased identical/similar capital assets from un-related third party in India. For B....