TaxTMI 
TaxTMI 
2017 (11) TMI 1838
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....hese services have been characterized as Information Technology Enabled Services ('ITES'). For asst. year 2012- 13, the assessee filed its return of income on 30/10/2012 declaring total income of Rs. 6,84,77,190/-. The case was taken up for scrutiny and a reference, u/s. 92CA of the Act was made by the Assessing Officer (AO) to the Transfer Pricing Officer (TPO)for determination of the ALP in respect of the international transactions entered into by the assessee with its AE's in the year under consideration. The TPO passed an order u/s. 92CA of the Act dated 29/1/2016 proposing an adjustment of Rs. 9,27,80,713/-; the breakup of which is as under. (i) ITES adjustment Rs. 4,49,14,397/- (ii) Interest chargeable Rs. 4,78,66,316/- Total T.P. adjustment Rs. 9,27,80,713/- After receipt of the TPO's order u/s. 92CA of the Act, the AO passed the draft order of assessment for asst. year 2012-13 dated 25/2/2016 incorporating the aforesaid TP adjustments as proposed by the TPO (Supra). 2.2 Aggrieved by the draft order of assessment dated 25/2/2016 for asst. year 2012-13, the assessee filed its objections thereto before the DRP which dispo....
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....d AO/TPO of conducting a fresh search for comparable companies and by rejecting the search process carried out by the Appellant as contemplated under Section 92C of the Act. 4.2 Honourable DRP have erred in law and on facts by upholding the approach of the learned AO/TPO in adopting! modifying the following additional filters for conducting Transfer Pricing analysis, without appreciating the Transfer Pricing Documentation prepared by the Appellant. 4.3 Honourable DRP have erred in law and on facts by modifying the approach of the learned AO/TPO and yet including additional comparable companies without considering the detailed submissions of the Appellant. * Accentia Technologies Limited; * TCS E-Serve Limited; * BNR Udyog Limited (Seg) (Medical Transcription); and * Infosys BPO Limited 4.4 Honourable DRP have erred in law and on facts by upholding the approach of the learned AO/TPO in rejecting functionally comparable companies selected in the Transfer Pricing Documentation of the Appellant and the comparable companies sought for inclusion by the Appellant at the time of proceedings before the learned TPO. * Ca....
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....ve erred in law and on facts by ignoring the information furnished in relation to break-up and ledger copy to establish exchange gain was made from operational transaction of provision of ITeS. 7. Computation of the operating margins 7.1 Honourable DRP have erred in law and on facts by upholding the approach of the learned AO/TPO of considering the miscellaneous income as non-operating in nature which is earned by the Appellant in the normal course of its operations of its business. 8. Risk adjustment and working capital adjustment 8.1 Honourable DRP have erred in law and on facts by upholding the approach of the learned AO/TPO in not appreciating that the Appellant being a captive service provider operates at lower risk levels as compared to comparable companies, which carry higher risks and accordingly erred in not granting appropriate risk adjustments to the margins of the comparable companies. 8.2 Honourable DRP have erred in law and on facts by concluding that the arithmetic mean margin of the comparable companies takes care of the adjustments on account of risk differences and thereby upholding the approach of the learned AO/TPO of....
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....by ignoring that the working capital adjustment takes care of the difference on account of outstanding debtors/creditors and the same does not warrant an additional adjustment by way of charging interest on the outstanding debtors. 9.5 Without prejudice to the above grounds in respect of re-characterization of trade debtors as loan, Honorable ORP has erred in considering the average interest on short term deposit for the period 180 days to 1 year and in not considering US dollar LIBOR prevailing during FY 2011-12 while determining the ALP, in view of the fact that the receivables are dollar denominated. 9.6 Honorable DRP and the learned AO/TPO have based his conclusion and consequent addition of notional interest on outstanding trade debtors, based on a number of assumptions and surmises as indicated below, to which the Appellant objects since the same neither represent facts nor is in line with the position in law and commercial practices. 10. Other transfer pricing related grounds 10.1 Honorable DRP and the learned AO/TPO have erred, in law and on facts in holding that the transactions between the Appellant and its AE were not at an ALP as defi....
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.... five comparable companies selected by the assessee. The TPO's set of 10 comparables are listed hereunder : Sl. No. Name of the case OP/OC 1 Accentia Technologies Limited 11.75 2 Universal Print Systems Ltd. (Seg.)(BPO) 52.46 3 Informed Technologies India Ltd. 6.08 4 Infosys BPO Ltd. 36.30 5 Jindal Intellicom Ltd. - 0.05 6 Microgenetic Systems Ltd. 19.61 7 TCSE - Serve Ltd. 63.69 8 BNR Udyog Ltd. (Seg.)(Medical Transc) 41.58 9 Excel INfoways Ltd. (Seg.) 29.79 10 e4e Healthcare Services Pvt. Ltd. 19.85 Average PLI 28.11 % 5.4 The TPO then computed the arms length price ('ALP') of the ITES of the assessee's transactions with its AE's as under:- Operating Cost Rs. 8,23,79,455 Arm's Length Mean Margin on Cost 28.11% Less : Working Capital Adj. (-) 48.38% Adjusted Margin 76.49% ALP @ 176.49% of operating cost Rs. 14,53,90,866 Price Received Rs. 10,04,76,469 Shortfall being adjustment in respect of the ITeS transactions. Rs. 4,49,14,397. 5.5 The TPO also proposed a TP adjustment in respect of interest ch....
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....assessee seeks exclusion of this company from the final set of comparables on the grounds that this company 'Accentia' is functionally different from the assessee in the case on hand, as it earns revenue from medical transcription business, billings and collections, coding activities etc. It is further submitted that this company, 'Accentia', is a diversified KPO and has the presence of brands, owns IPR's and has goodwill and therefore cannot be considered comparable to the assessee in the case on hand which provides only ITES to its AE's. In support of its claim, the assessee has placed reliance on the decisions of the co-ordinate bench of this Tribunal in the assessee's own case for asst. years 2011-12 in e4e Business Solutions India (P.) Ltd. v. Dy. CIT [IT(TP) A No: 1397/Bang/2016 dated 13/1/2017]. 7.2 Per Contra, the ld DR for Revenue supported the orders of the TPO in including this company, 'Accentia' in the final set of comparables, wherein it has been held that this company is providing only ITES Services and is not into software products or licensing activities. 7.3.1 We have heard the rival contentions and perused and carefully c....
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..... TCS E-Serve Ltd., ('TCS') 8.1 This company was selected by the TPO and included in the final set of comparables, overruling the assessee's objections to its inclusion on the grounds of functional difference, abnormally high margin, etc. Before us, the assessee seeks exclusion of this company, 'TCS' on the grounds that it is functionally different; as it is a KPO whose operations include delivering core business processing services, analytics and support services. It was also submitted that the segmental deails based on geographies has been disclosed but the segmental deails as per business segments has not been disclosed; that 'TCS' has huge turnover, and is a global brand with lakhs of employees. According to the ld AR since the TPO himself had rejected this company, 'TCS', as a comparable in the assessee's own case in the earlier year on account diversified activities, this company ought to be excluded in the year also. 8.2 The ld DR placed strong reliance on the orders of the authorities below in including this company, 'TCS', in the final set of comparables to the assessee. 8.3.1 We have heard he rival contentions perus....
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....This company was selected as a comparable by the TPO, overruling the assessee's objections that this company, 'BNR', is functionally not comparable to the assessee, fails the RPT filter, the foreign exchange filter and service income filter applied by the TPO. Both the TPO/DRP have rejected the assessee's contentions for exclusion of this company from the list of comparables and therefore the assessee is in appeal before the Tribunal. 9.2.1 Before us, the ld AR of the assessee submitted that this company 'BNR' is functionally different from the assessee. It is contended that 'BNR' has Commercial Medical Billing and Coding services in addition to Medical Transcription, but has not reported the results from these two activities in different segments, thereby rendering its results incomparable. Therefore, this company can be classified as rendering KPO services. 9.2.2 Apart from the above, it is also contended that this company, 'BNR', should be excluded from the set of comparables as its RPT at 49.60% is higher than the RPT filter of 25% applied by the TPO (Viz., that 'BNR' has RPT revenues of Rs. 1.70 crores as against total reve....
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....to the assessee, this company carried out both Medical transcription and medical billing and coding and thus performed KPO services also. In our view, this aspect requires examination, particularly in the light of the finding of the DRP that the assessee also performed a mix of high end and low end services. In this view of the matter, we deem it appropriate to remand the matter of comparability of this company, 'BNR', to the file of the TPO for examination and determination of this issue afresh, in line with the above observations made by us. Needless to add the TPO will pass orders deciding the issue only after affording the assessee adequate opportunity of being heard and to file details/submissions in this regard which shall be duly considered. We hold and direct accordingly. 10. Infosys BPO Ltd., ('Infosys') 10.1 This company was selected by the TPO and included in the final set of comparables overruling the objections of the assessee to its inclusion on grounds of its being functionally different from the assessee. Before us also, the assessee seeks exclusion of this company from the list of comparables on grounds this company, 'Infosys', being f....
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....arned Authorised Representative placed reliance on the decision of the coordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for Assessment Year 2008-09 wherein this company was excluded from the set of comparables. 6.7.2 Per contra, the learned Departmental Representative supported the orders of the TPO in including this company as a comparable to the assessee. 6.7.3 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncement relied on by the assessee. We find that the coordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for Assessment Year 2008-09 has excluded this company i.e. Infosys BPO Ltd. from the list of comparables to low end ITES/BPO support service providers as it is functionally different being an established market leader, enjoying huge brand value and goodwill, with huge economies of scale and diversity and geographical dispersion of customers. At para 24 of its order, the co-ordinate bench has held as under :- "(7) Infosys BPO Ltd 24. This company is listed at Sl.13 in th....
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.... 'Infosys', and following the aforesaid decision of the coordinate bench of this Tribunal in the assessee's own case for the earlier asst. year 2011-12 (Supra), we hold that this company shall be excluded from the set of comparables. We hold and direct accordingly. 11. Caliber Point Business Solutions Ltd., (Caliber') 11.1 This company was selected by the assessee as a comparable in its TP study. According to the assessee, this company is functionally comparable but has been rejected only grounds of different financial year ending. The ld AR for the assessee submitted that once functional comparability is established, the company cannot be rejected as a comparable on the ground of different financial year. In support of the assessee's above contentions for inclusion of this company 'Caliber' as a comparable, reliance was placed on the decision of the Hon'ble Delhi High Court in the case of CIT v. Mckinsey Knowledge Centre India Pvt. Ltd. (Supra). 11.2 Per contra, the ld DR for Revenue vehemently supported the orders of the authorities below. 11.3.1 We have heard the rival contentions and perused and carefully considered the material on re....
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....omparables. 12.2 Per contra, the ld DR for Revenue supported the orders of the authorities below in rejecting 'Cosmic' as a comparable. 12.3.1 We have heard the rival contentions and perused and carefully considered the material on record. On a perusal of para 7 at pages 4 to 6 of his order, the TPO has discussed the filters applied by him in the search process for selecting appropriate comparables in the case on hand. We find, from a perusal thereof, that the TPO has not applied the employee cost filter. When the TPO has not applied the employee cost filter in his own comparability analysis, it is not appropriate to reject a company on this filter that was not adopted by him in the first place. The DRP has given its reasoning as to why this employee filter is an appropriate filter for ITES companies. However, in our view, a filter cannot be applied selectively or arbitrarily, as applying a filter could alter the contours of the comparability analysis. In this view of the matter, we deem it appropriate to remand the issue of comparability of this company to the file of the TPO for fresh consideration. The TPO shall take into account the observations of the DRP, while ....
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....DRP, however, excluded this company from the set of comparables. 15.2.1 We have heard the rival contention and perused the material on record. The assessee is in appeal before us against the exclusion of this company, 'Jindal'. According to the assessee, this company is functionally comparable to the assessee and was accepted as such by the TPO. But the DRP excluded this company on its own accord, without affording both the assessee and TPO an opportunity in the matter, after observing from the Annual Report that this company provides both IT and ITES services whereas there is only one reported business segment as 'Call Centre Services'. It is in this context that the DRP observing that the assessee does not have segmental information related to ITES and therefore excluded this company. 15.2.2 The principle on which the DRP has excluded this company, 'Jindal' is valid. It is settled principle, upheld by several orders of the coordinate benches of this Tribunal, that if a company renders both IT and ITES services and there is no segmental information, then that company ought to be rejected as a comparable. However, in our considered view, the procedure ....
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....o be computed after allowing a credit period of 90 days and the interest is to be pegged with SBI rates for short term fixed deposits. (ii) The period of charging of interest is to be restricted to the period of the relevant asst. year; in tune with the decision of the ITAT, Mumbai Bench in the case of Technimont ICB House v. Dy. CIT [2015] 154 ITD 674/60 taxmann.com 143 (Mum. - Trib.). (iii) The adjustment is to be restricted for delay in payment; upto the end of the financial year. 16.4 Before us, the ld AR submitted that by proposing the notional interest on outstanding receivables from AE, the TPO has tried to bring within the ambit of sec 92 of the Act, a transaction that is non-existent. It was submitted that in the absence of any specific provision in the Act which seeks to tax any hypothetical income, the assessee cannot be subjected to tax on 'hypothetical income'; i.e., to say an income which ought to have been earned or that income which the assessee failed to earn. The ld AR further submitted that since in the case on hand, no income has been earned or can be said to have been earned by the assessee in respect of interest chargeable from AE's, the q....
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....ertain decisions of the Tribunal on the issue of charging of interest on receivables outstanding from AE's. In the case of Evonick Degussa India (P.) Ltd. v. Asstt. CIT [2013] 55 SOT 566/[2012] 28 taxmann.com 285 (Mum.) the Mumbai Bench of the ITAT dealt with his issue at paras 23 to 28 of its order and deleted the interest charged on receivables from AE's; holding at para 28 thereof that TP adjustment cannot be made on hypothetical and notional basis until and unless there is some material on record to show that there has been undercharging of real income. As pointed out by the ld DR, the decision of the Chennai Bench of ITAT in the case of Professional Access Software Development Pvt Ltd; (Supra) seems to suggest that interest on receivables can be charged if there is a long delay in realization of the receivables from the AE's. Therefore, there are contrary decisions of various Tribunals on this issue. 16.6.2 Be that as it may; even if the receivables outstanding from AE's are to be treated as international transactions subject to transfer pricing adjustment, we find that the process and procedure adopted by the TPO in this regard is not in order. The TPO has ....
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....erein it was held that any loss/gain arising out of foreign exchange fluctuation should be considered to be a part of operating profits. 17.2 It is an accepted principle, upheld in several decisions of this Tribunal, including that of SAP Labs India (P.) Ltd. v. Asstt. CIT [2011] 44 SOT 156/[2010] 8 taxmann.com 207 (Bang.) that foreign exchange fluctuations gain/loss is to be regarded as part of operating profits. However, from a perusal of the TPO's order u/s. 92CA of the Act, it emerges that the TPO had called for details from the assessee in this regard to determine whether the foreign exchange gain is out of the operations or not. Since the assessee failed to furnish the details called for, the TPO did not consider the foreign exchange gain as operational while computing the margin. Similarly, as the details in this regard were stated to have not been filed before the DRP also, the DRP upheld the action of the TPO. Before us it was submitted that the assessee had furnished details to the DRP in support of its claim that foreign exchange gain was only out of transactions related to ITES and therefore should be treated as operational in nature. 17.3 After considering th....
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....anies are full-fledged entrepreneurs carrying higher risk and therefore risk adjustment ought to be granted. 19.2 We have heard the rival contentions and perused and carefully considered the material on record. The issue of risk adjustment has been considered in several decisions of co-ordinate benches of this Tribunal wherein it has been held that as a matter of principle, risk adjustment needs to be granted. However, we find that in the case on hand the assessee has not furnished any details of the risk adjustment it seeks. In the absence of details/working/computation of the risk adjustment sought being filed by the assessee, the claim of risk adjustment is only an academic exercise and therefore we are not inclined to grant any such hypothetical adjustment. In this factual matrix of the matter, as discussed above, we dismiss this claim raised by the assessee for grant of risk adjustment 20. WORKING CAPITAL ADJUSTMENT 20.1 As regards its claim for working capital adjustment, the assessee contends that the TPO has computed negative working capital adjustment which is not tenable. In support of its contentions, the assessee placed reliance on the decision of the ITAT, Hyd....