AI Drafter 
TaxTMI 
TaxTMI 
2019 (8) TMI 1465
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....relevant to assessment year 2014-15. AE Nature of Transaction Amount (Rs.) Hyundai Auto Ever Corporation Purchase of computer 27,55,345/- Hyundai Auto Ever Corporation Purchase of Computer Software 47,69,485/- Hyundai Motor Company Provision of IT Enables Services 79,00,95,090/- Kia Motor Corporation Provision of IT Enables Services 32,22,89,270/- Hyundai Motor Company Reimbursement of expenses 10,67,59,106/- Hyundai Auto Ever Corporation Reimbursement of expenses 1,23,60,053/- Hyundai Motor Company Trade receivables 14,73,24,712/- Kia Motor Corporation Trade Receivables 4,24,66,790/- Hyundai Auto Ever Corporation Payables 29,61,156/- 3. Therefore, he made a reference to the TPO for determination of the Arms' Length Price (ALP) LP u/s 92CA of the Act. The TPO observed that the assessee is engaged in the business of rendering support services in relation to Computer Aided Designing (CAD). 4. He observed that the assessee has reported profit margin on cost at 10.22%.In order to determine whether the above transactions were at ALP, the TPO categorised the international transactions unde....
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....ved that the assessee has not submitted the details as to whether (i) the comparable companies have financed their working capital by own funds; (ii) whether any cost has been incurred on the working capital of the comparable companies; and if so (iii) how the cost of such working capital has had an impact on the margins of the comparable companies. 6. In accordance with the TP order, the draft assessment order was proposed against which, the assessee preferred its objections before the DRP seeking inclusion of certain companies (which have been rejected by the TPO) as comparable and exclusion of Eclerx Services Limited and certain other companies from the final list of comparables and also sought the working capital adjustment. The DRP rejected the assessee's objections on the comparability of (i) Infosys BPO Limited (ii) Eclerx Services Limited (iii) MPS Limited. As regards the companies to be included such as (i) Allsec Technologies Limited (ii) Jindal Intelicom Limited (iii) Harton Communications Ltd (iv) Tech Mahindra Business Services Limited (v) Sundaram Business Services Limited (vi) Microland Limited and (vii) Tricom Infotech Solutions Ltd, DRP did not accede to the....
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....sized company as compared to the Assessee. 2.5. On the facts and in the circumstances of the case and in contrary to law, Infosys BPO has to be rejected based on the fact that it undertakes significant onsite operations. 2.6. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred by not rejecting Infosys as comparable, as exclusion of Infosys BPO as comparable has been upheld by various ITAT orders. 3. eClerx Services Limited 3.1. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred in accepting eClerx Services Limited ('eClerx') as a comparable company to the Assessee though it is functionally different. 3.2. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred in accepting eClerx as comparable company though it fails peculiar economic circumstances filter applied by the Ld. TPO. 3.3. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred in accepting eClerx as comparable company though it operates under different business model. 3.4. On the facts and in the cir....
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....rred in accepting Microgenetics Systems Limited as a comparable company to the Assessee though it is functionally different. Incorrect rejection of comparables 8. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the Ld. TPO in rejecting the following companies engaged in Information Technology Enabled services as a comparables, without appreciating that the said companies were functionally comparable to the Appellant: Allsec Technologies Limited Informed Technologies Limited Jindal Intellicom Limited Harton Communications Limited Cheers Interactive India Private Limited Sundaram Business Services Limited Tricom Infotech Solutions Ltd. Incorrect computation of margin of comparable companies selected by Ld. TPO. 9. Without prejudice to the above grounds on rejection of functionally dissimilar comparable companies, on the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred by incorrectly computing the margin of following comparable c....
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....ugned companies, available in public domain viii. Rejected the multiple year data adopted by the Appellant Incorrect computation of Profit Level Indicator ('PLI') 13. On the facts and in the circumstances of the case and in contrary to 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 a non-operating expenditure while computing the PLI. Depreciation Adjustment 14. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the Ld. TPO in not allowing Depreciation Adjustment in accordance with the provisions of Rule l0B of the Income-tax Rules, 1962 to account for differences due to accelerated depreciation as charged by the Appellant against the different depreciation methodology and rates as applied by comparable companies. Working Capital Adjustment 15. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred in and the Hon'ble DRP further er....
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....ctual property in India. Therefore, according to him, the assessee is providing only ITeS services (BPO). He further led us to the AE agreement, wherein it is seen that no software development services are provided nor were any research services provided by the assessee and the assessee is also not rendering all the services specified in the agreement, but only CAE and CAE testing support services are provided. He submitted that the assessee company was established in the year 2007 in India and from the AY 2008-09 onwards, the assessee has been held to be an ITeS (BPO) company till AY 2010-11 and only in the AYs 2011-12 and 2012-13, the ITAT has held this company to be comparable to E-Clerx Ltd which is a KPO. He submitted that again in the AY 2013-14 and 2014-15 the assessee has been held as ITeS by the TPO as well as the DRP. Therefore, he submitted that it is necessary to go into the actual nature of work carried on by the assessee to hold whether the assessee is an ITeS company or a KPO. He submitted that the assessee's business falls within the ambit of Rule 10TA(e) of the Act and not under 10TA (g) of the Rules. He tried to distinguish the ITeS service from KPO service by....
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....oreign exchange, manpower and local and statutory risk. Therefore, all the risks and major functions are borne by the AE. He submitted that both the TPO as well as the DRP have considered the assessee as an ITeS company only and therefore, it cannot now be held to be a KPO. He also drew our attention to page 946 of the paper book which is "notes forming part of the financial statements for the year ending March, 2014" wherein the corporate information is given and it is stated that the company located in Hyderabad, was primarily engaged in research & development focussed design engineering and quality enhancement and provides back end operations like computer aided engineering and computer aided design etc. He submitted that this sentence is not included in inter-company agreement with AE. He has also drawn our attention to the ITAT orders in the assessee's own case for the earlier AYs wherein for the AY 2008-09 to 2010-11, the assessee has been held to be ITeS and E-Clerx Ltd has been directed to be excluded on account of functional dissimilarity and an extra ordinary event. He submitted that only for the AY 2011-12 and 2012-13 the assessee has been held to be comparable with ....
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....el for the assessee submitted that the said 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. 15. The ld DR however, submitted that nowadays, 90% of the publishing work is in digital form and therefore, the functions of MPS as well as the assessee are similar. Therefore, both the companies are comparable to each other. 16. Let us, therefore, compare the functions performed by the assessee before us, i.e. Hyundai Motor India Engineering (P) Ltd, E-Clerx, Infosys BPO Ltd and MPS Ltd. Hyundai Motor India Engineering (P.) Ltd Summary of functions performed by Hyundai India and its AEs under IT Enabled Services Functions Hyundai India AEs IT Enabled Services Identifying the customer No Yes Identifying the need for research services No Yes Conceptualizing basic design No Yes Negotiation of contractual terms with customers No Yes Imparting training No Yes Recruitment of manpower - Technical Yes No Rendering and delivering CAD/CAE related engineering design services Yes No Supe....
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.... the skills set of the employees is not known. 22. Infosys BPO Ltd Results of Operations The function-wise classification of the Standalone Statement of Profit & Loss is as follows: Year ended March 31 2014 % 2013 % Income from software services and products 44,341 100.0 36.765 100.0 Software development expenses 26,738 60.3 21,662 58.9 Gross profit 17,603 39.7 15,103 41.1 Selling and marketing expenses 2,390 5.4 1,870 5.1 General and administration expenses 2,686 6.0 2,218 6.0 5.076 11.4 4,088 11.1 Operating profit before depreciation 12,527 28.3 11,015 30.0 Depreciation and amortization 1,101 2.5 956 2/6 Operating profit 11,426 25.8 10,059 27.4 Other Income 2,576 5.8 2,215 6.0 Profit before exceptional item and tax 14,002 31.6 12,274 33.4 Dividend income - - 83 02 Profit before tax 14,002 31.6 12,357 33.6 Tax expense 3,808 8.6 3,241 8.8 Profit after tax and exceptional item 10,194 23.0 9,116 24.8 23. The f....
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.... - - 349 348 Buildings 4,053 825 - 4,878 1,467 287 - 1754 3,124 2,586 Plant & Equp 779 312 1 1090 547 125 1 671 419 232 Office Equp. 276 117 - 393 159 56 - 215 178 117 Comp. equp. 1525 672 19 2178 1053 520 19 1554 624 472 Furniture & fixtures 518 161 - 679 345 96 - 441 238 173 Vehicles 10 3 - 13 5 2 - 7 6 5 8001 2381 21 10361 3576 1086 20 4642 5719 4425 Intangible assets Intellectual Property Rights 59 - - 59 31 15 - 46 13 28 Total 8001 2381 21 10420 3607 1101 20 4688 5732 4453 Previous Year 7173 1422 535 8060 3112 956 461 3607 4453 At Note 2.16, the income from software services and products is given as under: Particulars Year ended March, 31 2014 2013 Income from software services 42,531 ....
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....res and Repairs and maintenance of Plant & Machinery for an amount of Rs. 144.19 crores. 30. Description of services: This company can be broadly divided into providing the following services to its customers: (a) Books and journal publishing services (b) Digital services (c) MPS 360 customer services (d) MPS technologies (e) Learning and new Media services (f) Ad-studio (g) Business process applications 31. Typesetting and XML Workflows: MPS production supports several workflows, including front-end XML workflows, several automated tools are in place for quick and efficient production, which includes XML production tools, pre-editing and copyediting tools, content consolidation tools, auto-pagination, PDF & Graphic production, quality control and automated receipt and delivery systems. 32. Thus, on a comparison of the functions of the assessee and other companies reproduced above, we find that E-Clerx Ltd is not only into ITeS services, but is also rendering KPO services and therefore, it cannot be compared to the assessee. In the decisions of the ITAT where it has been held to be a com....
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....lusion of certain companies are disposed of as above. 36. In Ground No.9, the assessee submits that the TPO has taken incorrect margins of Infosys BPO Ltd and, Microland Ltd. Since we have already held that Infosys BPO Ltd is functionally dissimilar to the assessee and has directed its exclusion, we are not adjudicating the same. However, with regard to Microland Ltd, we direct the TPO to take the correct margins of the said comparable. Ground No.9 is accordingly treated as partly allowed for statistical purposes. 37. As regards Ground Nos 10 to 12, we find that they need no specific adjudication as the assessee has not advanced any specific argument on the said grounds. As far as Ground No.13 is concerned, we find that this issue is covered in favour of the assessee by various decisions of the ITAT. The assessee has relied upon the following caselaw: (a) ITAT Pune Bench in the case of Demag Cranes and Components India (P.) Ltd. v. Dy. CIT [2013] 1 ITR (Trib.)-OL-32 (Pune). (b) ITAT Hyderabad Bench in the case of Kenexa Technologies (P) Ltd vs. Dy. CIT reported in (2015)37 ITR (Trib)306 (ITAT Hyd). 38. Respectfully following the decisions of the ITAT, par....