TaxTMI 
TaxTMI 
TaxTMI 
2020 (9) TMI 1
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....notices under section 143(2) & 142(1) were issued and served on the assessee. AO noted that during the year under consideration, assessee had undertaken International Transactions with its Associated Enterprises (AEs) exceeding Rs. 15 crore. He therefore, referred the international transactions to TPO for determining the Arm's Length Price (ALP). Thereafter, TPO vide order dated 22.01.2015 passed under section 92CA(3) directed the AO to enhance the income of the assessee by Rs. 5,52,01,139/- on account of ALP of international transactions relating to ITES services provided by the assessee to its AEs. In the draft assessment order, the AO proposed addition of Rs. 5,52,01,139/- against which assessee filed objections before the DRP. The DRP vide directions issued u/s 144C(5) of the Act dated 14.09.2015 upheld the adjustments proposed by TPO. Consequently, an order was passed by the AO on 19.10.2015 u/s 143(3) r.w.s 144C wherein he determined the total taxable income of the Assessee at Rs. 7,37,56,457/- and income under section 115JB at Rs. 7,10,21,074/-. Aggrieved by the aforesaid order of AO, assessee is now before us and has raised following grounds: "1. That the assessing office....
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....ment can be allowed to the appellant. 2.6 That the DRP/TPO erred on facts and in law in considering following companies in the final set of comparable companies without appreciating that companies with such high turnover does not satisfy the test of compatibility laid down under Rule 10B(2) of the Income-Tax Rules, 1962, for being operating in different market conditions and level of competition: Sr. No. Name of Comparable company Turnover (crores) 1. Infosys BPO Ltd. 1,129.11 2. TCS E-serve Ltd. 1,443,.39 2.7 That the DRP/TPO erred on facts and in law in considering following companies as functionally comparable to the appellant for the purpose of benchmarking analysis, allegedly holding that under TNMM, the standard of compatibility are relatively relaxed and only broad similarities of functions are required. 2.8 That on facts and circumstances of the case and in law, the DRP/TPO erred in not allowing compatibility adjustment on account of underutilization of capacity, arbitrarily holding that adjustments are required to be carried out in the operating profit margin of the comparable companies and not the appellant. 2.9 That the DRP/TPO erred on facts and in law ....
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....ng the alternative claim made by the applicant under section 10A of the Act. 3.5 That the assessing officer /DRP erred in not taking cognizance of the review orders passed by the Delhi High Court pursuant to the review petitions in case of Regency Creations and Valiant Communications, wherein the alternate claim under section 10A was held to be allowable. 4. That the assessing officer erred on facts and in law in levying interest under Section 234A, 234B and Section 234C of the Act. The appellant craves leave to add, amend, alter or vary, any of the aforesaid grounds of appeal before or at the time of hearing of the appeal." 4. Subsequently Assessee vide application dated 29.10.2018 has also raised an additional ground of appeal which reads as under: "The applicant craves leave to raise the following by way of additional ground of appeal: "That on the facts and circumstances of the case and in law the impugned order passed by the assessing officer is barred by limitation and therefore, is liable to be caused." The aforesaid additional ground of appeal raises purely a legal issue. In view of the above, the aforesaid additional ground of appeal calls for being admitted a....
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....ble companies worked out at Rs. 3.74% as against its profit margin of 7.83%. Since the profit margin of the Assessee was higher than the average profit margin of comparable companies, Assessee considered the international transactions undertaken by it with its AEs to be at arm's length. TPO did not accept the contentions of the Assessee. TPO re-characterized the business of the assessee and held it to be Knowledge Process Outsourcing (KPO) as against the characterization by the assessee of its business as Information Technology Enabled Services (ITES) provider. He thereafter, considering the assessee to be a 'KPO', considered the following companies to be comparable with that of the Assessee and the margin were worked out as under: Sr. No. Name of the Company WCA Adjusted OP/OC (%) 1. Acropetal Technologies Ltd. (Seg) 14.20% 2. Eclerx Services Ltd. 58.75% 3. ICRA Techno Analytics Ltd. 26.20% Average 33.05% 9. TPO also in the alternative held that if the activities of the assessee are considered to be a non KPO, then the comparable companies and the profit margin worked out by him were as under : Sr. No. Name of the Company WCA Adjusted OP/OC (%) 1. A....
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....ents of the customer V Collate the responses and questionnaires received from the vendors VI Communicating the details of the vendors to the associated enterprises 12. He pointing to the steps involved, submitted that the Assessee is merely restricted to entering the databases with contact details, email ids of vendors in India and verifying the same through phone calls and emails and thus the Assessee is providing routine ITES services. 13. He thereafter, submitted that Co-ordinate Bench of Tribunal in assessee's own case in assessment year 2010-11 and on identical facts had characterized the assessee to be a high-end ITES services provider and not as a KPO and in support of which he pointed to the order in ITA No.1103/Del/2015 dtd 27.4.2018 which is placed at pages 186 onwards in the paper book of case laws Volume 1. He thereafter, submitted that in subsequent year i.e. A.Y. 2013-14, the DRP vide directions dated 12.05.2017 has rejected the TPO's contention of considering the assessee as a KPO service provider and has held that the assessee to be a routine ITES company and to support the contention, he pointed to the copy of the order of the DRP for A.Y. 2....
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....Del) and Suessen Asia Pvt. Ltd. in ITA No. 1629/PUN/2011, the copies of which are placed in the paper book. 18. He submitted that if the aforesaid incomes are considered to be part of an operating income, the operating margin of the assessee would workout to 7.64%, and will be within the +/- 5% range of the margin of comparables and therefore, no adjustment will be called for. 19. On the issue of the comparables that have been selected by the TPO, he submitted that the TPO has selected 9 companies as being comparable to that of the Assessee. He submitted that the companies selected by the TPO do not satisfy the criteria of functional comparability as laid down under Rule 10B(2) of the IT Rules. He then proceeded to point out individually as to why those companies cannot be considered to be a comparable with that of Assessee. 20. With respect to the Accentia Technologies Ltd., which was considered to be a comparables by the TPO, he submitted that it is functionally not comparable with the assessee as it provides services to healthcare industry in the nature of medical transcription, medical coding, billing and receivable management etc. and it earns more than 75% of its revenue f....
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.... in the case of Evalueserve SEZ (Gurgaon) Private Limited (supra) and B. C. Management Service Ltd. (supra). He further stated that the aforesaid company has been held to be a KPO service provider and therefore, not comparable to a BPO service provider in various cases decided by the Tribunal. He pointed to the list of such cases in the synopsis. 22. With respect to ICRA Techno Analytics Ltd. which was considered by the TPO to be a comparable company, he submitted that it is functionally not comparable to the Assessee as it is engaged in diverse set of activities like business of software development and consultancy, engineering services as well as business analytics. He submitted that that Hon'ble Delhi Tribunal in the case of B.C. Management Services P Ltd. (supra) for AY 2011-12 had held it to be engaged in the business of business intelligence and analytics services, software development, consultancy services, engineering services, web development and hosting services and therefore not comparable to a BPO. He submitted that against the order of Tribunal, Revenue carried the matter before Hon'ble Delhi High Court, who dismissed the appeal of Revenue (ITA No 1064 & 1083 for AY 2....
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.... to be a comparable company to the Assessee, learned AR submitted that it cannot be considered to be a comparable with the assessee in view of the fact that it is a part of the Infosys group which is a giant in the field of IT services, it enjoys the benefits of the use of brand 'Infosys', availability of skilled manpower and technical knowhow etc. He further submitted it also exploits a valuable and internationally well recognized brand of 'Infosys' which leads to be a higher profitability. He further submitted that the Tribunal in various decisions cited in the synopsis has rejected it as a comparable company on account of high brand value as compared to a captive service provider. He further submitted that in assessee's own case for A.Y. 2010-11, the Hon'ble Tribunal held it to be not a comparable company with the Assessee. 25. With respect to the Acropetal Technologies Limited (Seg), which has been considered by TPO to be a comparable company, he submitted that it cannot be considered to be a comparable company with the assessee as it is engaged in providing KPO services and owns significant IPR. Further, the activities in which it is engaged are knowledge intensive activities....
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.... KPO is set aside and if the comparable companies which have been held by the TPO to be the comparable companies and which are objected to by the Assessee are excluded, and if the adjustment on account of idle capacity is granted to the assessee, no adjustment on account of transfer pricing adjustment would be called for. 29. Second issue is with respect to the denying deduction u/s 10B of the Act. 30. AO noted that the assessee had claimed exemption of Rs. 1,82,35,728/- u/s 10B of the Act. Assessee was asked to showcause as to why the deduction u/s 10B of the Act not be denied as it had taken approval from Software Technology Park of India ('STPI'). According to AO, STPI was not a competent authority to give approval for exemption u/s 10B of the Act. Assessee made detailed submissions for its claim and in the alternate submitted that if the Assessee is denied the claim u/s 10B of the Act then the assessee be allowed deduction u/s 10A of the Act. The submissions made by the assessee were not found acceptable to the AO. The AO was of the view that assessee has not provided any notification or document suggesting that the inter ministerial committee or the director of STPI were nom....
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....elf appraisal, comments of supervisory staff. He further submitted that the CBDT vide its Notification No.73/2013 dated 18.09.2013 wherein Safte Harbour Rules have been notified, has in the definition of "KPO" services included the services rendered by the assessee as "KPO". He therefore submitted that the re-characterization of the business has been correctly done by the TPO and upheld by DRP and therefore the order of the authorities be upheld. 34. With respect to the assessee's submission that the DRP for A.Y. 2012-13 has accepted the assessee to be an ITES company. He submitted that the findings of the DRP for A.Y. 2012-13 may not be taken to have been accepted by the Revenue in view of the fact that after removal of sub-section 2A of section 253 by Finance Act, 2016, Revenue is precluded from filing any further appeal against the order of DRP. He further submitted that the principles of res judicata are not applicable to the Income-tax proceedings. 35. With respect to the companies for which the assessee is seeking its exclusion as comparable companies, he pointed to the findings of TPO, DRP and submitted that the authorities after taking into account the submissions of the ....
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....wing the claim on the basis of the decision of Tribunal for A.Y. 2010-11, he submitted that the principles of res judicata are not applicable in income tax proceedings. He further submitted that the alternate claim of deduction u/s 10A was not claimed either in the original ITR or by filing revised return of income and therefore in view of decision of Hon'ble Apex Court in the case of Goetze (India) Ltd vs. CIT reported in 284 ITR 323 the claim of the assessee was rightly denied. He thus supported the order of AO of lower authorities. 41. We have heard the rival submissions and perused the relevant materials available on record. The first issue is with respect to Transfer Pricing Adjustment of Rs. 5,52,01,139/-. We find that in TP study report assessee had considered itself to be in the business of providing Information Technology Enables Services (ITES) in the field of data processing to its associated enterprises. TPO re-characterized the business of the assessee and held the assessee to be a KPO service provider. TPO thereafter, after considering the assessee to be a KPO services provider, considered certain companies to be comparables with that of the assessee as a KPO and the....
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....e same time it is also a settled law that there ought to be uniformity in treatment and consistency when facts and circumstances are identical. In the present case, as noted above, the business of the Assessee has been held to be in ITES segment in AY 2010-11 by the co-ordinate Bench of Tribunal and by DRP in AY 2013-14. Before us, no material has been placed by the Revenue to demonstrate that the characterization of the assessee as ITES service provider as held by the Tribunal in earlier years has been set aside/ stayed or overruled by higher judicial forum. Further no distinguishing feature in the activities undertaken by the assessee in the year under consideration or in earlier/ subsequent year has been pointed out by Revenue. In view of these facts and following the principle of consistency, we hold that TPO was not justified in re-characterizing the assessee to be a KPO service provider. We therefore, hold that the assessee to be an ITES company. 44. As far as the computing of operating margins is concerned, we find that while computing the operating margin of the assessee TPO has considered the income arising out of foreign exchange fluctuation, miscellaneous income and sun....
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....ning from those fields are more than 75%. Before us, Learned AR has pointed to the fact that it owns significant intangible assets in form of goodwill etc. amounting to Rs. 21.94 crores and it also owns proprietary software products. Further, he has also pointed out to the fact that though it is engaged in the medical transcription and development of software products but the segmental profitability is not available in the financial statements. The aforesaid contentions of the Learned AR have not been controverted by the Revenue. We find that the Delhi Bench of Tribunal in the case of E-Valueserve SEZ (Gurgaon) P. Ltd. for AY 2011-12 had rejected it to be a comparable company to an ITES service for the reason that it is engaged in the business of medical transcription, medical coding and billing. The order of the Tribunal has also been upheld by the Hon'ble High Court. Similar view has also been taken by the Tribunal in other cases. We are therefore of the view that Accentia Technologies Ltd cannot be considered to be a comparable to Assessee. In view of these facts, we direct the AO to exclude it on account of functional dissimilarity. 47. With respect to Exlerx Services Ltd., we....
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....as a comparable company in other decisions rendered by the Tribunal. In view of these facts, we hold that Infosys BPO Ltd cannot be considered to be a comparable company and therefore direct its exclusion. 50. As far as Ld AR's contention of excluding Acropetal Technologies Ltd (Seg) as a comparable company is concerned, before us, Learned AR has pointed out that it is providing KPO services and owns significant IPR, requiring high level of skill and application of intellectual property. The aforesaid contentions of the Learned AR not been controverted by DR. We further find that Hyderabad Bench in the case of TNS India Pvt. Ltd. (ITA No.1875/Hyd/2012) had directed to its exclusion by holding that the services provided by it in the nature of high end services coming within the category of Knowledge Process Outsourcing (KPO) and it cannot be compared with a low end service provider. We further find that Hon'ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. (supra) has held that a company engaged in the KPO services cannot be a appropriate comparable for the purpose of benchmarking international transaction of BPO services. In view of these facts, we are of the view ....
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....he Assessee with its AEs keeping in view the observations made by us in the preceding paragraphs. Thus the grounds of assessee are partly allowed. 54. As far as the issue of granting of deduction u/s 10A/10B is concerned, we find that the claim of deduction u/s 10B was denied to the assessee and alternate claim of deduction u/s 10A was also not allowed. We find that identical issue arose in Assessee's own case in AY 2010-11. The Co-ordinate Bench of Tribunal, will deciding the issue in assessee's own case for A.Y.2010-11 (ITA No 1103/Del/2015 order dtd 27.04.2018 ) had restored the matter to the file of the AO for examining the claim of the assessee by observing as under : "4.3 We have heard the rival submission and perused the relevant material on record. In assessment year 2007-08, the assessee made alternative claim for deduction under section 10A of the Act in proceedings under section 147 of the Act. The Assessing Officer denied the alternative claim of deduction under section 10A of the Act. In appeal having ITA No. 5473/Del/2016 for assessment year 2007-08, the Ld. DR contended that proceeding under section 147 of the Act are for the benefit of the Revenue and not for the....