TaxTMI 
TaxTMI 
2020 (2) TMI 972
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.... Company Ltd., Zurich (SRZ) Switzerland and is engaged in providing consultancy/ information technology enabled services (ITeS) to its foreign Associate Enterprises (AE). The assessee-company filed its return of income for Assessment Year 2010-11 on 29.03.2011 declaring total income at Rs. 7,87,57,222/-. Along with the return of income, the assessee furnished report under Form 3CEB, reporting international transaction with its AE. The assessee reported following international transaction in its Form 3CEB: Sr. No. Nature of Transaction Amount (Rs.) Method 1 Provision of support services. 35,51,49,879 TNMM 2 Reimbursement of Expenses 1,14,11,154 TNMM 3 Import of Fixed Asset 180,886 TNMM 3. For bench marking of provision of support services, the assessee selected Transaction Net Margin Method (TNMM) as most appropriate method. The profit level indicator (PLI) selected was operating profit/ total cost (OP/TC). The assessee has shown its margin at 14.86% for transaction of provision of support services. The assessee selected 9 company as comparable and computed the margin on the basis of single year average margin in the following ma....
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....ment of Rs. 6,84,85,849/- in the following manner: Particulars Amount Total Operating cost in relation to provision of support services 32,70,05,579 Arm/s Length Revenue as Per Comparables @ 29.55% 42,36,35,579 Value of international transaction (B) 35,51,49,879 105% of international transaction 37,29,07,373 95% of international transaction 33,73,92,385 8. The TPO noted that ALP falls outside the tolerance range of +/- 5% of transaction value, accordingly, amount of (Rs. 42,36,35,725/- minus Rs. 35,51,49,879/-) an adjustment of Rs. 6,84,85,849/- was proposed in the international transaction with regard to provisions of support services. The Assessing Officer on receipt of report of TPO, made upward adjustment/addition of Rs. Rs. 6,84,85,849/- in the draft assessment order passed under section 143(3) r.w.s. 144C(1) dated 17.02.2014. The copy of the draft assessment was served on the assessee. 9. The assessee filed its objections before DRP-IV, Mumbai. The DRP after considering the objection of assessee directed to include certain item excluded by TPO on the ground that such item of "other income" are operating in nature. However, in case the....
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....ncluding Accentia Technologies Ltd ('Accentia') on the ground that Accentia is engaged in ITES, even though Accentia is not functionally comparable of the Appellant and has undergone extraordinary event during the year under consideration and hence should be rejected. 1.3.2 The Learned TPO/AO/DRP has erred in including Acropetal Technologies Ltd. on the factually incorrect ground that it operates in two segments namely engineering design and ITES and the ITES segmental results were considered to be comparable to the assessee. However, it is evident from the Annual Report of the company that its segments are Engineering Design., IT (& not ITeS) and Health Care Services. Moreover, the TPO and DRP erred in not considering that Acropetal is engaged in development of software products and hence not comparable to the Appellant. 1.3.3 The learned TPO/AO/DRP erred in upholding the selection of Eclerx Services Ltd. ('Eclerx'), on the ground that Eclerx operates in the domain of ITES even though Eclerx is not functionally comparable and subcontracts/outsources its work, thereby operating in a different business model and hence is not comparable to the Appellant. 1.....
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....s be dropped in the matter. Ground 3 - Short credit for advance taxes paid and taxes deducted at source 3.1 The learned AO erred on facts and in law in granting short credit for advance taxes of Rs. 19,950,000 as against Rs. 25,336,000 claimed by the Appellant in the return of income. 3.2 The learned AO erred on facts and in law in granting short credit for tax deducted at source ('TDS') of Rs. 104,760 against Rs. 821,509 claimed by the Appellant in the return of income. The Appellant prays that the learned AO be directed to grant the credit of Rs. 25,336,000 for advance taxes and Rs. 821,509 for TDS as claimed by the Appellant in the return of income. Ground 4 - Consequential reliefs 4.1 The learned AO under the directions of the Hon 'ble DRP erred in arriving at various unwarranted and erroneous conclusions unsupported by any relevant material in deciding the case. Further, they also failed to consider the contrary material and evidence adduced by the Appellant. Accordingly, the Appellant prays that the AO be directed to grant all consequential reliefs arising out of reliefs from this appeal. 4.2 The learn....
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....e additional ground of appeal raised by assessee. Considering the facts of the case, we find that no additional facts are required to be brought on record for adjudication of additional ground of appeal, all facts relating to adjudication of additional grounds are emanating from the orders of lower authorities. Accordingly, the additional grounds of appeal raised by assessee are admitted for adjudication. 13. Now, turning to the merits of various grounds of appeal. The ld. AR of the assessee submits that in case from final set of comparable, the comparable no. 5, 7, 8 & 9 i.e. Infosys BPO, Accentia Technologies, Acropetal Technologies and E-Clerx Services Ltd. are excluded and Datamatics Financial Services Ltd. are included, the assessee's margin would be within permissible range. The ld. AR further submits that E-Clerx and Accentia Technologies was excluded in the assessee's own case for A.Y. 2009-10 in ITA No. 1465/Mum/2014 dated 31.08.2018 on the test of functionality. Further, Acropetal Technology and Infosys BPO are also not functionally comparable with the assessee. 14. For exclusion of Infosys BPO, the ld. AR of the assessee submits that the retention of Infosys BPO....
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....ee submits that IT segment of Acropetal cannot be compared to the assessee company, which is undisputedly an ITeS company. The activities undertaken by Acropetal are not comparable to the functions of the assessee and this comparable is liable to be excluded. The reliable segmental data is not available. The ld. AR of the assessee submits that Hon'ble Delhi High Court in PCIT vs. Sexo India Private Ltd. (ITA No. 682 of 2016 dated 28.09.2016) held that in case of TNMM, reliable segmental details of all three elements, i.e. cost, sales and assets employed are required. Mere allowability of segmental sale is not sufficient. 16. The For inclusion of Datamatics Financial Services Limited., the ld. AR of the assessee submits that the TPO has rejected Datamatics on the ground that it is a "persistent loss making" company. The ld. AR of the assessee submit that it is a well settled law that a company cannot be considered as a persistent loss making company if it has incurred a loss in one or two financial years consecutively. This filter was also applied by the assessee while eliminating companies to arrive at a set of comparable in the TP study. It was submitted that Datamatics has enj....
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.... noted in AY 200910 TPO included Accentia Technology and eClerx in final set of comparable, the inclusion was affirmed by DRP, however, on appeal before the Tribunal both the comparable were excluded order dated 31.08.2018, vide ITA No. 1465/Mum/2014 and 1493/Mum/2014 with the following direction: "7. We have heard both the counsel and perused the records. The ld. Counsel of the assessee submitted that the assessee disputes the following selection of comparables in this case: a) Coral Hubs Ltd. also known as Vishal Information Technologies Ltd. b) Eclerx Services Ltd. c) Accentia Technologies Ltd. d) Cosmic Global Ltd. 8. ................. ................. Accordingly, we proceed to adjudicate the issue as under: a) ................ b) Eclerx Services Ltd.: In respect of this comparable, the assessee has submitted that this is engaged in data analytic KPO service specializing in the field of financial services and retail and manufacturing. The assessee has submitted that as Eclerx is a KPO whereas the assessee has been classified as an IT Enabled service provider by the TPO, Eclerx c....
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....market research, market support, analysis of data etc. Hence, functionally there appears to be no reason why Eclerx should not be compared with the assessee. Hence, this comparable is retained. In this regard, the ld. Counsel of the assessee submitted that unlike this comparable, Eclerx Services Ltd. is not involved in high-end services and it is not a KPO. It has been submitted that the assessee is engaged into various services like data analytical, data processing services, pricing analytics, bundling optimization, content operation, sales and marketing support, product data management, revenue management. For this, the ld. Counsel of the assessee has referred to extracts from the annual report. On the other hand, it has been submitted that the assessee is merely engaged in rendering of support services to its foreign AE. Hence, it has been claimed that Eclerx Services Ltd. is engaged into the various services which are functionally dissimilar to the assessee. It has been further submitted that no segmental financial data is available and, hence, in the absence of said data, it cannot be said to be comparable to the assessee. In this regard, the ld. Counsel of the assessee ....
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.... support, product data management, revenue management. Furthermore it is noted that Eclerx Services also offered financial services such as real-time capital markets, middle and backoffice support, portfolio risk management services and various critical data management services. 14. The observation of the learned DRP that assessee and Eclerx Services are KPOs and hence comparable is also not sustainable. The Hon 'ble Delhi High Court in the case of Actis Global Services Private Limited (supra) had held that even though both being KPOs two entities are not comparable if they were catering to different types of business. 15. From this it is amply clear that the said diverse activities are not comparable with the service of providing analytical solution rendered by the assessee. Moreover though some functions are similar, there are lot of other functions by M/s.EcIerx Services which are not done by the assessee. Hence, absence of segmental data make comparability not feasible. In these circumstances and in the facts and circumstances discussed above considering the precedents as above, we are of the considered opinion that Eclerx Services is not comparable in thi....
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.... to determine the ALP of the Respondent's transactions. (ii) The impugned order renders a finding of fact that the nature of activities carried out by M/s. Accentia Technologies Ltd., are different from that carried out by Respondent. M/s. Accentia Technologies Ltd., developes its own software and rendered Medical transcription services while the Respondent is providing BPO Services. Besides, the impugned order of the Tribunal held that high profit margins of M/s. Accentia Technologies Ltd., was attributable to amalgamation which took place in the previous years relevant to subject Assessment Year. Therefore, not comparable. (iii) In fact, this Court in GIT v/s. Aptara Technology Ltd., (Income Tax Appeal No. 1209 of 2015) has upheld the view of the Tribunal in not accepting the Accentia Technologies Ltd., as comparable, inter alia, on account of fact that extra ordinary event such as merger/ amalgamation would affect the profitability of M/s. Accentia Technologies Ltd., Thus, making it incomparable. (iv) Further, in that case, as in this case, the Tribunal has also recorded a finding of fact that the / activities of M/s. Accentia Technologies....
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....igh Court in CIT vs. Pentair Water India (P.) Ltd. (supra) while considering the question of law relating to the exclusion of this comparable on size and turnover filter affirmed the exclusion. The Hon'ble Delhi High Court in Sanvih Info Group (supra) also confirmed the exclusion of Infosys BPO being a giant company. We have further noted that by following the decision of Hon'ble Bombay High Court in CIT vs. Pentair Water India (P.)Ltd. (supra), the co-ordinate bench of Tribunal in Hapag Lloyd Global Services Ltd. vs. DCIT (ITA No. 7539/Mum/2014 held that the turnover of Infosys BPO is very high comparative to tested party and excluded and excluded this comparable. Considering the consistent view of Hon'ble Delhi High Court, Hon'ble Bombay High Court and co-ordinate bench of Tribunal, we are of the view that Infosys BPO is a market leader and a giant company with a different risk profile and nature of service, has brand value and hence not comparable to the assessee due to huge difference in the size and scale of the company. Therefore, we direct the AO to exclude Infosys BPO from final set of comparable as the same is not comparable with assessee, which is proving captive services....
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....considered, which is factually incorrect. In our view in absence of reliable segmental data with regard to ITeS services, the Acropetal cannot be considered as valid comparable. Thus, we direct the AO/TPO to exclude this comparable from final list of comparable. 24. Now turning to the inclusion of Datamatics Financial services Ltd (Datamatics). As noted above the ld AR for the assessee vehemently argued that the TPO has rejected Datamatics on the ground that it is a "persistent loss making" company, though Datamatics has earned net profits (Profits before Tax) in FY 2007-08 to FY 2010-11. And relied on the decisions of Hon'ble Bombay High Court in Goldman Sachs (India) Securities Pvt. Ltd. vs. CIT (supra), wherein it was held that a company which had losses in two consecutive years were held not to be a persistent loss making company and was accepted as a comparable. The TPO rejected Datamatics by taking view that it is a loss making company. Though, the assessee brought the facts on record that in FY 2007-08 this company earned profit of R. 3.77 Crore before tax. The ld. DRP affirmed the action of AO by taking view that the segmental information of this comparable for ITeS is n....
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....isions of Chapter X of the Income-tax Act, 1961 ('the Act'). 1.2 The learned AO / TPO under the directions of the Hon'ble DRP erred on facts and in law in disregarding the various submissions made by the Appellant without providing any cogent reasons thereof and rejected comparable companies selected by the Appellant without appreciating the fact that such selection was based on contemporaneous data and the transfer pricing study report prepared and maintained as per Section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('the Rules'). 1.3 The learned A.O / TPO under the directions of the Hon'ble DRP erred on facts and in law in considering additional companies for determining the arm's length price of the international transactions, without taking into consideration the differences in the functions performed, assets employed and risks undertaken between the Appellant and the companies considered by the TPO as comparable and without finding any material deficiencies in the benchmarking analysis undertaken by the Appellant. The ld. TPO/AO/DRP have erred in erroneously selecting comparable company and adding cert....
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....s compulsorily required to be done in accordance with the provisions of Rule 10B(1)(e)(iii) of the Rules, to account for difference between international transactions and the alleged comparable uncontrolled transactions selected by the learned AO/TPO. The Appellant prays that the learned AO/TPO be directed to consider the international transaction of the Appellant as arm's length and accordingly the transfer pricing adjustment of Rs. 36,593,538 should be deleted. Ground 2 - Penalty Proceedings under Section 271 (1)(c) of the Act 2.1 On the facts and in the circumstances of the case, the learned AO has erred in law in proposing to initiate penalty proceedings under Section 271 (1)(c) of the Act. The Appellant prays that the penalty proceedings be dropped in the matter. Ground 3 - Short credit for taxes deducted at source 3.1 The learned AO erred on facts and in law in granting short credit for taxes deducted at source ('TDS') of Rs. 857,776 as against Rs. 1,145,750 claimed by the Appellant in the return of income. The Appellant prays that the learned AO be directed to grant further credit of Rs. 287,974 for T....