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2020 (9) TMI 1
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....case was selected for scrutiny and thereafter 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 foll....
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....lding that unless the specific details of abnormal factors in case of comparable companies are available in public domain, no comparability adjustment 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 ho....
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....aw in rejecting the claim of deduction under section 10B of the Act which has consistently been allowed since assessment year 2006-07. 3.4 Without prejudice to the above, the assessing officer / DRP erred on facts and in law in not allowing 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 i....
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....ng Profit/Operating Cost (OP by OC%) as the Profit Level Indicator (PLI) which was computed at 7.83%. Assessee had selected three comparables namely Allsec Technologies Ltd., Cyber Media Research Ltd. and ICRA Online Ltd. as comparable companies. As per the Assessee, the average mean profit margin of the comparable 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....
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....base (searching for vendors providing services as per the client's requirements) IV Identifying Potential Suppliers PRIMARY PROCESS I Calling suppliers to verify their contact details such as telephone number, email address, etc. II Issuing questionnaires to the vendors III Follow-up to get the responses from the listed companies IV Sharing product specifications over the email and a brief discussion of the product requirements 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 ....
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.... had dismissed the appeals of revenue in all the aforesaid three cases. He pointed to the copies of the decisions placed in the paper book. 17. With respect to considering the sundry balances written back as operating income, he submitted that the write back of liabilities are related to the core operation of the assessee and therefore, should have been taken into consideration while computing the margin of the assessee and in support of which he placed reliance on the decision in the case of Sony India Pvt. Ltd. 114 ITD 448 (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 ....
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....d therefore cannot be considered to be a comparable with that of Assessee. He submitted that the Hon'ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. (supra) has clearly made a distinction between BPO and KPO companies and it was held that Eclerx Services Ltd. being a company engaged in provision of KPO services cannot be regarded as an appropriate comparable for the purpose of benchmarking the international transaction of provision of BPO services. He further submitted that Delhi High Court has also upheld its exclusion 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 ....
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....pra) TCS E-serve Ltd. to be rejected as valid comparable. He further submitted that Hon'ble Delhi High Court in the case of PCIT vs. Oracle (OFSS) BPO Services Pvt. Ltd. (ITA No.124/2018) has held that companies having significant brand presence cannot be regarded as appropriate comparable for the purpose of benchmarking the international transactions undertaken by a captive service provider. He therefore submitted that the company be held to be not comparable to the Assessee. 24. With respect to Infosys BPO Ltd. which was considered by TPO 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 a....
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.... the profit margin of the assessee will work to 18.50% (the details of which are worked out on Page 19 of the synopsis) and therefore, no adjustment would be called for. He submitted that the Tribunal in assessee's own case for A.Y. 2008-09 had allowed the adjustment on idle capacity. In support of his contention of granting adjustment on account of idle capacity, he pointed to the various decisions listed in the synopsis. 28. He therefore, to summarize submitted that if the incorrect re-characterization of the business of the assessee of being the 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 Pa....
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....ated to its functions performed which clearly suggest that it is a 'KPO'. He further submitted that the TPO during the course of assessment proceedings had asked the assessee to provide list of employees with details like nature of service rendered, copy of self appraisal submitted by top two employees for each designation type, comments of the supervisory officers to examine the characterization of business as BPO vis-à-vis KPO. He submitted that assessee only provided the list of employees without the requisite detail like nature of services, copy of self 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. 201....
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....mitted that the reliance placed by the assessee on the decision of Regency Creations and Valiant Communications, wherein the alternate claim u/s 10A was held to be allowable are distinguishable on facts and therefore not applicable to the Assessee's case. He submitted that in the case of Regency creations, assessee had obtained approval u/s 10A and had made claim u/s 10B. He submitted that the benefit of deduction u/s 10B is radically different from the one envisioned u/s 10A of the Act and two provisions are separate and distinct from each other. 40. With respect to allowing 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 ....
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....g the assessee as the KPO service provider and held assessee to be a routine ITES company. Before us, Learned DR has supported the re-characterization made by the TPO and submitted that though the business of the assessee would have been characterized as ITES in earlier and subsequent year but in view of the principle of res judicata being not applicable to income tax proceedings and each assessment year being distinct and different, the order of TPO needs to be upheld. We are aware of the principles that res judicata principle is not applicable to the income tax matters but at the 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 activi....
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....rial to demonstrate that the liabilities written back pertain to capital expenditure. We therefore hold that the income arising out of sundry balances written back needs to be considered an operating item. The AO/TOP is therefore directed to consider the same as part of operating income while working out the margins of the Assessee. 46. Now we take up the issue of selection of various comparable companies. With respect to Accentia Technologies Ltd., it is seen that it provides service to healthcare industry in the nature of medical transcription, medical coding etc. and revenue's earning 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 SE....
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....Analytics Ltd on account of functional dissimilarity. 49. As far as the Ld AR's contention for excluding Infosys BPO Ltd as a comparable company is concerned, we find that the aforesaid company was rejected as a comparable company in assessee's own case by Co-ordinate Bench of Tribunal in A.Y. 2010-11. We further find that it was rejected as a comparable in the case of E-Valueserve SEZ (Gurgaon) P. Ltd. and against the order of Tribunal, the matter was carried before the Hon'ble Delhi High Court and the appeals of the Revenue were dismissed. Further the aforesaid company was also rejected 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 B....
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....mparable company. Thus, we are upheld the order of the TPO in considering it to be a comparable company. 52. Before us, assessee has sought the adjustment on account of idle capacity. We find that the co-ordinate Bench of Tribunal in assessee's own case in AY 2009-10 has granted the adjustment on account of idle capacity. Following the decision of Co-ordinate Bench of Tribunal in assessee's case for A.Y. 2009-10, we direct the AO to grant the adjustment on account of idle capacity. 53. We thus direct the AO/TPO to compute the Arms Length price of the international transactions entered into by the 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 m....