AI Drafter 
TaxTMI 
TaxTMI 
2019 (7) TMI 1584
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....omer services. In the year under consideration, the assessee has classified its international transactions as ITES and had conducted its comparability analysis by applying TNMM as the Most Appropriate Method (MAM). 2.2 For Assessment Year 2014-15, the assessee filed its return of income on 30.11.2014 declaring an income of Rs. 53,30,22,220/-. The case was selected for scrutiny for this Assessment Year. A reference under section 92CA of the Act was made by the Assessing Officer (AO) to the Transfer Pricing Officer (TPO) for determination of the Arms Length Price (ALP) of the international transactions entered into by the assessee with its AEs in this year. The TPO passed an order under section 92CA of the Act dated 30.10.2017 proposing a Transfer Pricing (TP) adjustment of Rs. 15,11,87,300/- in respect of the ITES rendered by the assessee to its AEs. After receipt of the TPO's order, the AO passed a draft order of assessment under section 143(3) r.w.s. 92CA of the Act dated 22.12.2017, wherein the assessee's income was determined at Rs. 68,64,27,760/- in view of, inter alia, the aforesaid TP adjustment of Rs. 15,11,87,300/- proposed by the TPO. 2.3 Aggrieved by the dra....
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....in applying export earning filter of 75% instead of 25% of the total sales, leading to a narrower set of comparable companies. 8. The learned AO/learned TPO/Hon'ble DRP erred in collating the information that are not publicly available using powers under section 133(6) of the Act. 9. The learned AO/learned TPO/Hon'ble DRP has erred in the comparability analysis used for determination of the ALP 10. The learned AO/learned TPO/Hon'ble DRP has grossly erred in not rejecting the following companies from the list of comparable companies: 1. Infosys BPO Ltd. 2. Microland Ltd. 3. BNR Udyog Ltd. 4. Crossdomain Solutions Pvt. Ltd. 11. The learned AO/learned TPO/Hon'ble DRP has grossly erred in rejecting companies that ought to have been accepted as comparable: 1. Allsec Technologies Ltd. 2. Caliber Point Business Solutions Ltd. 3. Informed Technologies Ltd. 4. Ace BPO Services Pvt. Ltd. 5. Crystal Voxx Ltd. 6. Jindal Intellicom Ltd. 7. Sundaram Business Services Ltd. 12. The learned AO/learned TPO/Hon'ble DRP has erred in not all....
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....nsidered international transactions with the AEs to be at arms length. 4.2 The TPO rejected the assessee's TP study for the reasons mentioned in his order under section 92CA of the Act; suo motu carried out a fresh comparability analysis by adopting certain filters and using the current year data only and selected the following five companies. Sl. No. Company Name OP/OC (in %) 1. Infosys Systems Ltd., 27.43 2. Microgenetic Systems Ltd., 18.06 3. Microland Ltd., 20.07 4. BNR Udyog Ltd., 25.08 5. Cross domain Solutions Pvt. Ltd., 21.07 Average 22.34% 4.3 In view of the above, the TPO computed the TP adjustment to the transactions in the ITES segment of the assessee company as under:- Arm's Length Mean Margin on cost 22.34% Operating Cost 3234500000 Arm's Length Price (ALP) of operating revenue (@ 122.34% of OC) 3957087300 Price Received 3805900000 Variation in Price 151187300 3% of price received 114177000 Shortfall being adjustment 151187300 4.4 The above TP adjustment proposed by the TPO was incorporated in the draft order of assessment for Assessment....
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....in the case on hand which provides low end ITES. (ii) It provides business process management services, consultancy and management services and end-to-end outsourcing, as can be seen from pages 5, 14 and 33 of its Annual Report. (iii) It is engaged in research and development. II Ownership of intangible assets This company, Infosys, owns intangible assets worth Rs. 19 Crores during the year as can be seen from pages 16, 47 and 58 of its Annual Report; whereas the assessee does not possess any intangible asset. III Brand Value 'Infosys' has brand value; having incurred Rs. 5 Crores for its brand building and advertisement, as can be seen from pages 24, 29, 47, 58 and 64 of its Annual Report; whereas the assessee does not have any brand. IV Sub-contracting Infosys operates on a different business model as it has incurred Rs. 157 Crores towards cost of technical sub-contractors. 7.2.2 In support of the assessee's contentions, the learned AR submitted and took us through the relevant pages of the Annual Report of 'Infosys'. It was submitted that for the reasons given above, it has been consistently held by various benches of th....
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....s' has been excluded from the list of comparables for the reason that it has brand value which had an impact on its pricing and margins. As the facts of the year under consideration are similar, the decision rendered in the earlier year would apply to the year under consideration as well. In this factual view of the matter, we hold that Infosys BPO Ltd., stands on a totally different footing from a company engaged in rendering routine back office ITES; being both functionally different and having brand value and therefore is to be excluded from the final set of comparables. We hold and direct accordingly. 8. Microland Ltd., ('Microland') 8.1 This company 'Microland' was selected as a comparable company by the TPO despite the objections to its inclusion in the final list of comparables both before the TPO and DRP. 8.2.1 Before us, the assessee has objected to the inclusion of this company 'Microland' on the following grounds:- (i) that it is functionally different as it provides cloud computing related services; which services relate to private cloud, desk top virtualization, cloud migration, hybrid cloud migration, server management, et....
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....ly and held that its entire operations to be comparable to the assessee at entity level. 8.4.2 We have perused the Annual Report of the company 'Microland', placed at pages 140 to 277 of the paper book. At page 14 of the Annual Report, this company has characterized itself as a service company primarily rendering Infrastructure Management Services. At page 97 of the Annual Report, it is mentioned that the company is organized in business segments comprising of infrastructure services and ITES thereby clearly indicating that the services rendered in both segments are different and distinct from each other. In our view, the TPO/DRP have not brought on record any evidence to support their contention that both the aforesaid segments are rendering ITES only. If that were so, there was no reason whatsoever for the company to show Infrastructure Management Services as different and distinct segment from the ITES. 8.4.3 From an appraisal of the details submitted, it is seen that the services rendered by 'Microland' under Infrastructure Management services are Server Management, Database Management, storage management, Archival Management, Network Management, etc., whi....
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....daram Business Services Ltd., 10. Informed Technologies Ltd., ('Informed') 10.1 This company 'Informed' was selected by the assessee as a comparable company in its TP study. The TPO in his order rejected this company stating that since 'Informed' is being primarily engaged in the business of Business Process Outsourcing, it fails the service income filter. On the objections filed by the assessee, the DRP concurred with the finding of the TPO by observing that the Annual Report shows that the sale of services is Rs. 2,58,53,362/- as against the total revenue of Rs. 3,81,86,665/- which comes to only 67.7% and therefore fails the service income filter applied by the TPO. 10.2 Before us, the learned AR for the assessee contended that this company 'Informed' is functionally comparable to the assessee as it is an ITES provider and qualifies the service income filter of 75% applied by the TPO. It was submitted that the entire service income of 'Informed' at Rs. 2,58,53,362/- is from rendering of ITES only and the TPO/DRP have wrongly considered "other income" of Rs. 1,22,85,303/- as "Service Income". In support of this contention, the learn....
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....;) 11.1 This company, 'Crystal' was proposed by the assessee before TPO as an additional comparable to be included in the final set of comparables. The TPO, however, rejected the assessee's proposal on the ground that this company had not reported any earnings from export of services and therefore it is not possible to determine as to whether 'Crystal' has exports/foreign earnings more than 75% of total sales/turnover. The DRP concurred with the finding of the TPO; observing that while it is stated that "income from foreign currency" is Rs. 3,23,08,386/-, it is not clear whether this relates to export of services as this information is not available and therefore this company 'Crystal' is rejected. 11.2 Before us, it was contended that this company 'Crystal' is functionally comparable to the assessee in the case on hand as it is operating as a BPO Company which is a ITES provider. According to the learned AR, it is very evident from a perusal of the Annual Report of this company 'Crystal' that the income in foreign currency amounting to Rs. 3,23,08,386/- is out of export of services. In support of this contention, the learned AR too....
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...., is functionally comparable to the assessee in the case on hand and passes all the filters applied by the TPO. According to the learned AR, the TPO himself had selected this company, 'Jindal' as a comparable in the earlier Assessment Years 2011-12 and 2012-13 and also in the subsequent Assessment Year 2015-16 and as the facts in the year under consideration are similar, there is no good reason to exclude this company from the final set of comparables in this year. In support of the claim that this company 'Jindal' was functionally comparable to the assessee in the case on hand, the learned AR placed reliance on the decision in the case of CGI Information Systems & Management Consultants (P.) Ltd. (supra), wherein this company 'Jindal' was held as comparable to companies rendering ITES. 12.3 Per contra, the learned DR for Revenue supported the orders of the TPO/DRP in not including this company 'Jindal' in the final set of comparables. 12.4.1 We have considered the rival contentions/submissions put forth and perused the material on record. We have also perused the Annual Report of this company, 'Jindal'; which is placed at pages 498 to ....
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....s AE's in UK. Finland. Germany, Sweden. Belgium, Denmark. Norway and USA. A perusal of its Form 3CEB for the instant assessment year which is produced at pages 1035-1046 of the paper book, shows that it provided services to AE's at USA also. Therefore, the entire basis for its exclusion is wholly misconceived and erroneous and. accordingly, its suo motu exclusion by the DRP is not proper. The functions performed by this company are comparable to the services provided by the Assessee and have not been disputed whatsoever by the DRP. That apart, Jindal has been selected by the TPO as a comparable to the Assessee for the assessment years 2008-09, 2011-12 and 2013-14 and its inclusion for those assessment years has not been objected to by the Assessee either. Moreover, it is consistently figuring in the list of comparables in companies providing ITES. We therefore direct inclusion of this company in the list of comparable companies. 12.4.3 In respect of the assessee in the case on hand also, the facts are similar to the cited case (supra). It is also seen that this company, 'Jindal' was chosen/accepted by the TPO as comparable to the assessee in the case on hand both....
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....[2019] 101 taxmann.com 313 (Bang. - Trib.) has discussed the matter and held that working capital has to be allowed. The learned AR prayed that in view of the above, the TPO be directed to allow working capital adjustment on actual basis. 13.4 Per contra, the learned DR for Revenue supported the orders of the TPO/DRP in the matter. 13.5.1 We have considered the rival submissions and perused the material on record; including the judicial pronouncement cited. We find that the assessee has filed the computation of working capital adjustment before the DRP; copy of which is placed at page 226 of the paper book; but the DRP has not considered the same. We also find that the Co-ordinate Bench of this Tribunal in the case of Huawei Technologies India (P.) Ltd. (supra) has discussed all the reasons on the issue and held that working capital shall be allowed; holding as under at paras 10 to 18 thereof- 10. The next grievance projected by the Assessee in its appeal is with regard to the action of the CIT (A) in not allowing any adjustment towards working capital differences. On this issue we have heard the rival submissions. The relevant provisions of the Act insofar as compar....
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....ational transaction [or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions: (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction [or a specified domestic transaction] if- (i) none....
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....ounts receivable a company is allowing its customers a relatively long period to pay their accounts. It would need to borrow money to fund the credit terms and/or suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element to reflect these payment terms and compensate for the timing effect. 14. The opposite applies to higher levels of accounts payable. By carrying high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an element to reflect these payment terms and compensate for the timing effect. 15. A company with high levels of inventory would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. Note that the interest rate July 2010 Page 6 might be affected by the funding structure (e.g. where the purchase of inventory is partly funded....
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....rts of companies engaged or different segments and therefore proper comparison cannot be made. (iii) Disclose in the balance sheet does not contain break up of trade and non-trade debtors and creditors and therefore working capital adjustment done without such break up would result in computation being skewed. (iv) Cost of capital would be different for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable results. 16. The CIT (A) also placed reliance on a decision of Chennai ITAT in the case of Mobis India Ltd. v. Dy. CIT [2013] 38 taxmann.com 231/[2014] 61 SOT 40. That decision was based on the factual aspect that the assessee was not able to demonstrate how working capital adjustment was arrived at by the Assessee. Therefore nothing turns on the decision relied upon by the CIT (A) in the impugned order. In the matter of determination of Arm's Length Price, it cannot be said that the burden is on the Assessee or the Department to show what is the Arm's Length Price. The data available with the Assessee and the Department wo....
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....ussion we are of the view that the CIT (A) was not justified in denying adjustment on account of working capital adjustment. Since, the CIT (A) has not found any error in the TPO's working of working capital adjustment, the working capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working has been given by the Assessee and a copy of the same is at pages 173 & 192 of the Assessee's paper book. No defect whatsoever has been pointed out in these working by the CIT (A). We may also further add that in terms of Rule 10B(1)(e)(iii) of the Rules, the net profit margin arising in comparable uncontrolled transactions should be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions which could materially affect the amount of net profit margin in the open market. It is not the case of the CIT (A) that differences in working capital requirements of the international transaction and the uncontrolled comparable transactions is not a difference which will materially affect the amount of net profit margin in the open market. If for rea....