TaxTMI 
TaxTMI 
2019 (9) TMI 973
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....e point support, customer support and management fee) 54,09,98,363 RPM GP/Sales 69.98% 16.20% Software development services 34,03,33,789 TNMM OP/OC 15.33% 10.39% Related IT Services 69,73,50,295 TNMM OP/OC 15.17% 10.39% Shared Services 25,12,89,099 TNMM OP/OC 11.01% 11.13% Recovery of expenses 2,00,437 CUP method NA NA NA Reimbursement of expenses 56,59,352 CUM method NA NA NA 3. Therefore, the determination of the Arms' Length Price (ALP) of these transactions was referred to the TPO u/s 92CA of the Act. The TPO in Para 5 of his order recorded the assessee's submissions as under: "5. Examination of TP study conducted by taxpayer: In the TP documentation, the taxpayer has benchmarked the transactions under three segments namely; software distribution, software development (including related IT services) and shared services (ITES). As per the taxpayer analysis, the PLI of the taxpayer is higher than the comparable companies' results for the transactions pertaining to software development and software distribution segments. No adjustment has been proposed to t....
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..... This is discussed in detail in later part of this notice. 3 Companies reporting net sales >Rs. 1 crore This is an appropriate filter 4 Companies reporting manufacturing + trading sales/net sales < 25% i.e. predominantly into rendering of services This is an appropriate filter which similar to the filter of service income used by this office 5 Companies with foreign exchange earning >25% This is an appropriate filter 6 Select companies having RPT<25% This is an appropriate filter 7 Companies with similar nature of operations This is an appropriate filter As per the provisions of section 92C(3) r.w.s. 92CA where during the course of any proceeding, the TPO, on the basis of material or information or documents in the possession is of the opinion that the information or data used in computation of the arm's length price is not reliable or correct, the TPO may proceed to determine the arm's length price in relation to the international transactions in accordance with Sec. 92C(1) and 92C(2) on the basis of such material or information or document available with him. After rejecting the filters applied by the taxpayer, the T....
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....8103 16.34 3 Infosys BPO Ltd 18313654987 14136657182 4176997805 29.55 4 Microland Ltd 2423900000 2231500000 192400000 8.62 5 Capgemini Business Services (India) Ltd 5181918537 4087308886 1094609651 26.78 6 E4e Healthcare Business Services P Ltd 1091819827 931110730 160709097 17.26 7 Hartron Communications Ltd (Seg.) 184308416 138132416 46176000 33.43 22.30 10. The assessee submitted its objections to the above companies except Microland Ltd. The TPO rejected the assessee's objections and computed the Average Mean Margin of these companies at 22.30% and after allowing working capital adjustment, he proposed the adjustment of Rs. 2,09,93,894/-. 11. The TPO further observed that the assessee has trade receivables which was not reported in its form 3CEB. Observing that with retrospective amendment of section 92B of the Act, receivables form part of international transaction, he proposed to charge interest @14.45% p.a. The assessee objected to the same by submitting that "outstanding receivables are consequent to the international transa....
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....uest for inclusion of the companies selected by it. 15. As regards the ALP adjustment on trade receivables, the DRP held that it is an international transaction requiring TP adjustment. However, the AO was directed to apply the applicable interest rates instead of 14.45% applied by the TPO according to the number of days delay. In accordance with the DRP order, the final assessment order dated 31.10.2017 was passed, against which the assessee is in appeal before us by raising the following grounds of appeal: "Based on the facts and circumstances of the case, Infor (India) Private Limited (hereinafter referred to as 'the Appellant') respectfully craves to prefer an appeal against the Assessment order passed under Section 143(3) read with Sections 92CA(3) and l44C (13) of the Income-tax Act, 1961 ('the Act') by the Deputy Commissioner of Income-tax Circle 2( 1), Hyderabad (hereinafter referred to as the 'Assessing Officer' or 'Ld. AO') in pursuance of the directions issued by the Hon'ble' Dispute Resolution Panel - I, Bengaluru (hereinafter referred to as the Hon'ble ORP) on the following grounds which are without prejudice to one a....
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....n the circumstances of the case and in law, the Ld. TPO erred in and the Hon'ble DR? further erred in upholding/confirming the action of the Ld. TPO in selecting Microgenetics Systems Limited as a comparable without appreciating that it operates under a different business model i.e. outsources its activities. 4. E4e Healthcare Business Services Private Limited 11.1 On the facts and in the circumstances of the case and in law, the Ld. TPO erred in and the Hon'ble DR? further erred in upholding / confirming the action of the Ld. TPO in selecting E4e Healthcare Business Services Private Limited as a comparable. 11.2 On the facts and in the circumstances of the case and in law, the Ld. TPO erred in and the Hon'ble DR? further erred in upholding / confirming the action of the Ld. TPO in selecting E4e Healthcare Business Services Private Limited as a comparable, without appreciating that the said company is engaged in the business of providing health care outsourcing services for health care industry. 11.3 On the facts and in the circumstances of the case and in law, the Ld. TPO erred in and the Hon'ble DRP further erred in uph....
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....an upper turnover filter, thereby disregarding the importance of turnover in the benchmarking of comparables ii. Selected certain companies wherein peculiar economic circumstances / extra-ordinary events had occurred during the relevant year iii. Selected companies which were not comparable to the Appellant iv. Selected companies earning abnormal profits v. Used Related Party transaction filter of25 percent as against 10-15 percent vi. Used arbitrary filter of export sales applying a threshold limit of25 percent vii. Rejected of companies having a different Financial Year ended without appreciating that the results for the relevant financial year could be reasonably extrapolated from the Financials of the impugned companies, available in public domain viii. Rejected the multiple year data adopted by the Appellant Incorrect computation of Profit Level Indicator ('PLI') 9. On the facts and in the circumstances of the case and in law, the Ld. TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the Ld. TPO in considering provision for bad and doubtful debts as....
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....facts and in the circumstances of the case and in law, the Ld. AO erred in applying the credit period available to the Appellant, as per the intercompany agreement, as benchmark for computing the transfer pricing adjustment since credit period based on intercompany agreement defies transfer pricing provisions. 5. On the facts and in the circumstances of the case and i 0 Jaw. the Ld. TPO and the Ld, AO erred in bringing notional interest to tax without considering the fact that neither the AE nor the Appellant charges any interest in case of delay in payment LEVY OF INTEREST UNDER SECTION 234(3) OF THE ACT: 12. On the facts and in the circumstances of the case and in law, the Ld. A 0 erred in and the Hon'ble DRP further erred in upholding/confirming the action of the Ld. AO in levying interest uls 2348 of the Act and the said levy of interest being Wholly Unjustified, ought to be deleted. The Appellant craves leave to add, alter, vary, omit substitute or amend the above grounds of appeal. at any time before or at the time of hearing of the appeal, so as to enable the Hon'ble' Members" to decide this appeal according to law. 16. At the t....
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....The learned DR further submitted that the assessee also is into rendering high end BPO services. He submitted that as seen from its profile, assessee is also rendering high end BPO services like Hartron Communications Ltd and therefore, both the companies are comparable to each other. He also submitted that the extra ordinary/peculiar circumstances filter should be proved to have effect on the operational income of the assessee and without any such evidence, the peculiar circumstances filter cannot be applied. 20. Having regard to the rival contentions and the material on record, we find that the assessee is rendering various activities which have been reproduced by the TPO in the TP order. However, the TPO has considered the assessee to be rendering ITeS services. As seen from the Annual Report of the Hartron Communications Ltd at page 477, 481, 482 and 522 of the paper book, we find that it is in the business of both export and domestic BPO services and is also entered into an MOU with Vector for construction of a modern multistorey building and a new building is under construction. From para 19 of its Annual Report, it is seen that Hartron Communications has revenue from thre....
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....e segmental results/information is not available. He also submitted that it is an exceptional year of operation with an increase in revenue from BPO business to the tune of 483.72% over the last year and there is a huge fluctuation in the financial results of the company in the earlier and subsequent A.Ys. He also submitted that the fluctuation is on account of difference in treatment of income and expenditure. He submitted that the said company, on one hand, recognizes exceptional revenue on cash basis and the expenditure on accrual basis and thus it violates the concept of mercantile system of accounting. Therefore, it cannot be held as a comparable. The assessee also referred to the decisions of the Tribunal at Delhi in the case of Ciena India in ITA No.1453/Del/2014 wherein it was held that companies whose financial results are not based on mercantile system of accounting, should not be taken as a comparable. In support of this contention, the learned AR referred to the Annual Report of the said company. 9. On the other hand, the learned DR relied upon the orders of the authorities below and submitted that sufficient information with regard to the revenue from ITES is ....
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....e excluded on account of exceptional year of performance i.e. peculiar circumstances filter. 22. As regards the comparability of Microgenetics Systems Ltd is concerned, the learned Counsel for the assessee submitted that it operates under different business model as it has incurred significant outsourcing cost. We find that the TPO has held that the Revenue from operations of this company is on account of sale of medical transcription services which also falls under ITeS and that it passes all the filters applied by the TPO. The DRP has confirmed the findings of the TPO. 23. The learned DR, therefore, supported the orders of the authorities below and also he drew our attention to page 489 of the paper book wherein the medical transcription charges are shown at Rs. 1,92,11,588/-. He submitted that unless and until it is shown that the revenue from outsourcing of the services has an impact on the operating margin of the said company, the same should not be excluded as long as it is functionally similar to the assessee. The learned Counsel for the assessee had relied upon the decision of the ITAT in the case of Avineon India P Ltd vs. DCIT in ITA No.238 & 257/Hyd/2016 dated 7.7.....
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....imilar set of facts, this company is directed to be excluded from the final list of comparables. Thus, the assessee's grounds for exclusion of Microgenetics Systems Ltd are allowed. 25. As regards inclusion of Caliber Point Business Solutions Ltd is concerned, the learned Counsel for the assessee submitted that though it satisfies all the filters applied by the TPO and is functionally comparable to the assessee, the TPO & DRP have excluded the same on the ground that it applied different financial year. He placed reliance upon following decisions for inclusion of the said company: i) Cameron Manufacturing India P Ltd v. DCIT (TS-1254-ITAT-2018 (Chny)-TP ii) Microsoft India (R&D) P Ltd v. DCIT 197 Taxmann.com 360 (Del- Trib) iii) Maersk Global Service Centers (India) Pvt. Ltd vs. ITO (TS-633- ITAT-2016)(Mum) 26. The learned DR, on the other hand, supported the orders of the authorities below and submitted that this company has been excluded because its turnover was less than Rs. 1.00 crore. The learned Counsel for the assessee did not rebut this argument of the learned DR. Therefore, even though it satisfies the functionality test, because it does no....
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....regard to the RPT transaction of the company have been given, we are of the opinion that the findings of the DRP & TPO are factually incorrect. Therefore, we remand the comparability of this company also to the AO/TPO for reconsideration. Needless to mention that the assessee should be given a fair opportunity of hearing. A.Y 2014-15 33. During the financial year relevant to A.Y 2014-15, the assessee has entered into the following international transactions: AE Nature of transaction Amount (In Rs.) Software Distribution and related services Software distribution and related services 26,59,18,189 Software development services Software development services 41,90,07,650 Related IT Services Related IT Services 74,40,98,080 Shared services Shared services 26,57,72,035 34. The taxpayer has carried out the economic analysis and has summarized the international transactions as under: Nature of transaction Amount (Rs.) MAM PLI Margin of taxpayer Margin of companies Software Distribution and related services 26,59,18,189 RPM GPM 51.79% 4.77% Software development services 41,90,07,650 TNMM OP....
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....of turnover were excluded. 38. Applying the above filters, the TPO rejected 9 companies out of 11 companies selected by the assessee as comparables for the following reasons: S.No Name of the company (M/s.) Margin (%) Remarks 1 Akshay Software Technologies Ltd 6.09% Akshay Software Technologies Ltd (the parent) is engaged in providing professional services, procurement, installation, implementation, support and maintenance of ERP products and services, in India and overseas. As reported in Note 27 of the annual report, the company has incurred Foreign Branch Expenditure of Rs. 19.32 cr against total expenditure of Rs. 22.73 cr during the year (85%). Hence operating model of the company is different from the taxpayer. Functionally different. Hence rejected 2 CG-VAK Software & Exports Ltd 2.49% The company is engaged in the development of computer software providing services in IT and ITES (page 38 of AR) and no segmental information available 3 Cigniti Technologies Ltd 19.83% Accepted as comparable 4 Goldstone Technologies (India) Ltd 9.97% Fails export sales/sales >75% filter. Hence rejected 5 R.S.Software 19.5....
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....ers, he conducted fresh search for comparables: i) Companies whose data is not available for the financial year 2013-14 were excluded. ii) Companies whose revenue from IT Enabled service is less than Rs. 1.cr. are excluded. iii) Companies whose revenue from IT enabled service is less than 75% of the total operating revenues are excluded. iv) Companies who have more than 25% related party transactions (sales as well as expenditure combined) of the sales were excluded. v) Companies which have export sales less than 25% of the sales were excluded. vi) Companies who have diminishing revenues/persistent losses for the last three years upto and including financial year 2013- 14 were excluded. vii) Companies having different financial year ending (i.e. no March 31, 2013) or data of the company does not fall within 12 month period i.e. 01-04-2013 to 31.03-2014 were rejected. viii) Companies that are functionally different from the taxpayer were excluded. ix) Companies that are having peculiar economic circumstances were excluded. x) Companies that are having negative networth were excluded. 42. Thu....
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....ordance with the directions of the DRP, the AO passed the draft assessment order, against which the assessee preferred its objections to the DRP, which confirmed the draft assessment order and accordingly final assessment order was passed against which the assessee is in appeal before us by raising the following grounds of appeal. 46. As far as ALP of ITeS segment is concerned, we find that the assessee is seeking exclusion of the following companies: i) Infosys BPO Services Ltd ii) e Clerex Services Ltd iii) Cross Domain Solutions Ltd iv) Microgenetics Systems Ltd v) Microland Ltd vi) NPS Ltd. 47. The assessee is seeking inclusion of the following companies: i) Caliber Point Business Solutions Ltd ii) Ace BPO Services Ltd iii) Allsec Technologies Ltd iv) Jindal Intellicom Ltd v) Informed Technologies Ltd. 48. At the time of hearing, the learned Counsel for the assessee submitted that the assessee is not pressing for inclusion of Allsec Technologies Ltd and Jindal Intellecom Ltd. Therefore, grounds relating to these two companies are rejected as not pressed. 49. As regards....
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....comparables. 54. As regards eClerex Services Ltd is concerned, the learned Counsel for the assessee submitted that it is rendering KPO services, such as, data management and analytics solutions and has earned super normal profit during the year under assessment i.e. 70.26%. He also relied upon the assessee's own case for the A.Y 2011-12 wherein the Tribunal had held it to be a KPO and not comparable to the assessee. 55. The learned DR however, submitted that the assessee is also doing high end BPO services which are akin to KPO services and therefore, the said company should be retained as a comparable. 56. Having regard to the rival contentions and the material on record, we find that this company has been held to be a KPO service provider whereas the assessee has been categorised as a BPO by the TPO & DRP. Having held so, the said company cannot be treated as a comparable to the assessee. Further, in the assessee's own case for the earlier A.Y (to which both of us are signatories), we have held that this company cannot be a comparable to the assessee. Since there is no change in the activities of the said company, we do not find any reason to take any other view and ther....
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....hat this company is a publishing company and is totally into a different business model and therefore, cannot be considered as a comparable to the assessee company. 64. The learned DR supported the orders of the authorities below. 65. Having regard to the rival contentions and the material on record, we find that the comparability of this company to an ITeS company had arisen for the very same A.Y in the case of Hyundai Motor India Engineering (P) Ltd. In the said case, we have held this company to be comparable to the assessee therein. Relevant paragraphs are reproduced hereunder for ready reference: "34. As regards MPS Ltd, though we find that it has huge Plant & Machinery and has incurred huge expenses towards Repairs and Maintenance, we also find that it has described itself as an ITeS service provider, and that its outsourcing cost is Rs. 10.78 crores only. Therefore, it is functionally similar to the assessee and therefore, cannot be excluded. 66. Respectfully following the same, we hold this company to be comparable to the assessee. 67. In the result, grounds relating to the exclusion of comparables are treated as allowed. 68. As regards SDS segment i....
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....d Counsel for the assessee however, drew our attention to page 963 of the Paper Book, which is part of the Annual Report of Evoke Technologies Ltd wherein the revenue of Indian Branch of assessee is separately shown. Taking the same into consideration, we direct the AO/TPO to reconsider the comparability of this company by taking the revenue from Indian Branch only. Thus, the ground for Maveric Systems Ltd is rejected and for Evoke Technologies Ltd is allowed for statistical purposes. 74. As regards exclusion of Infosys Ltd, Larsen & Toubro Infotech Ltd and Mindtree Ltd, the common ground of the assessee is that they have huge turnover of Rs. 42,531 crores, Rs. 4,648.38 crores and Rs. 3,031.6 crores respectively as against the assessee's turnover of Rs. 116.00 crores only. The learned Counsel for the assessee also argued that they are functionally dissimilar and own intangibles etc. 75. The learned DR argued that unless the assessee demonstrates as to how the huge turnover impacts the margin of the said companies, they should not be excluded from the final list of comparables. 76. Having regard to the rival contentions and the material on record, we find that the Hon'b....
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.... company is functionally different from the assessee. Considering the aforesaid aspect, the Co-ordinate Bench in case of Telcordia Technologies India (P.) Ltd. (supra), which is for the very same assessment year, has excluded this company as a comparable. Similar view has also been expressed in the other decisions cited by the learned Authorised Representative. Thus, keeping in view the decisions of the Tribunal referred to above, we hold that this company cannot be a comparable to the assessee. 38. We have considered rival submissions and perused materials on record. Though, it may be a fact that the assessee may not have objected to selection of this company before the Transfer Pricing Officer, however, the assessee raised objections against selection of this company before the DRP as well as before us. The grievance of the assessee is, the company being involved in development of products and since no segmental details are available in the annual report, it cannot be treated as comparable. The Co-ordinate Bench in Tech Mahindra Ltd. (supra) having found this company to be involved in development of software product and trading in software licenses has held that it canno....
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....is also into products. However, as rightly pointed out by the learned DR, there is no sale of any products and this company is involved in export of software services only. Mere mention of products in the annual report without any products in effect cannot make this company a product company. Therefore, this company is comparable to the company and need not be excluded. The assessee's ground with regard to this company is rejected. 84. As regards R S Software (India) Ltd, the assessee is seeking its exclusion on the ground that its onsite expenditure is 57.80% of the total sales and that it is engaged in the licensing activity i.e. it has employed intangible such as software services and thus, it is also product based company. The TPO and DRP have rejected the assessee's contention on the ground that this company is functionally comparable to the assessee and that onsite and offsite expenditure are not determining factors for comparability of this company with the assessee. As regards the licensing activity, it was held that the said licenses are used for development of software solutions and licenses and it does not amount to rendering of any other activities. Though the learne....
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....ention that it has not paid any interest on outstanding payables and therefore, the interest should not be charged on the trade receivables is not sustainable for these A.Ys. The argument that it is a debt free company and therefore, no interest is also to be charged is not acceptable. 87. The learned Counsel for the assessee has placed reliance upon various case law. However, we find that they are relating to the A.Ys prior to the amendment of section 92B of the Act. However, the interest on trade receivables should be calculated at the interest rate applicable for the relevant period as is charged by SBI on the short term deposits. The AO has allowed the credit period of 60 to 90 days as per the agreement for A.Y 2013-14 but for the A.Y 2014-15 he has allowed only 30 days as credit period. This action of the AO cannot be upheld. If there is a clause in the agreement about credit period, the interest should be calculated only on the period exceeding such credit period in the agreement, but if there is no credit period specified in the agreement, then the credit period of 90 days or the industry average credit period should be considered with the assessee's own credit period and....