TaxTMI 
TaxTMI 
2020 (9) TMI 819
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....ons with its associated concerns and accordingly, matter was referred to transfer pricing officer (TPO) - 3(2), Mumbai u/s 92 CA(3) of the Act. 3. The TPO observed that M/s M. Model Global Services Pvt. Ltd. provides IT services such as maintenance of software, management of servers, provision of technical support, documentation of software code and ITES service and Back Office services such as quality assurance, vendor management and investor relationship, etc. 4. M/s M. Modal Systems and Services Inc. (referred M. Modal US) is a group company of the assessee. M. Modal India and M Modal US are owned by a common set of shareholders. M. Modal US is engaged in servicing the contracts entered into with the existing customers, providing front-end and maintaining customer relationship. M. Modal India and M. Modal US are associated enterprises under the Indian Transfer Pricing Regulations and assessee has entered into the following international transactions with its AE during the year:- Sr. No. Transaction Amount (Rs.) Method adopted 1 Provision of IT and Quality Assurance-' Support Services 44,45,79,632 TNMM 2 Provision of Medical Transcription S....
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....tions from DRP made an addition of Rs. 1,44,69,701/- on account of TP adjustment and retained the disallowance u/s 36(1)(5)(a) on delayed deposit of PF and ESI. 9. Further, assessee made objections before DRP that AO did not allow any set off of brought forward losses and depreciation which he ought to have allowed. Since the DRP while passing the draft assessment order, observed that the draft assessment order has noted that total loss available for any set off in the current year on the basis of assessment orders passed in earlier years is NIL. The set off of brought forward losses has to be given on the basis of assessment orders passed i.e. the assessed income and therefore, no interference is called for. 10. Against the above order of DRP, assessee is in appeal before us raising the following grounds of appeal:- 1. On the facts and in the circumstances, and in law the learned AO and the learned Transfer Pricing Officer ('TPO') under the directions of the Hon'ble Dispute Resolution Panel (`DRP') have erred in making a Transfer Pricing adjustment of Rs. 1,44,69,701/- under chapter X of the Act in the hands of the Appellant. 2. On the facts....
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....not allowing deduction under section 10AA in respect of the disallowance of the employee's contribution to provident fund (PF) and employee's state insurance scheme (ESIC). 11.0n the facts and in the circumstances, and in law the learned AO under the directions of the Hon'ble DRP have erred in not granting set-off of brought forward losses of previous years against the returned income of the current year. 12. On the facts and in the circumstances, and in law the learned AO has erred in levying interest under section 234B and 234C of the Act and initiating penalty proceedings under section 271(1)(c) of the Act. The Appellant prays that the transfer pricing adjustment be deleted and relief may be granted accordingly. The Appellant craves leave to add, alter, amend or withdraw all or any of the grounds of appeal herein above and to submit such statements, documents and papers as may be considered necessary either at or before the hearing of this appeal as per law. 11. At the time of hearing, Ld AR submitted that assessee presses only ground no 6 relating inclusion of Excel Infoways Ltd as the comparable company and ground nos 9, 10 an....
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....oyee cost of ITeS/BPO segment, the claim of the asessee that comparable frails employee cost is unsubstantiated & accordingly rejected. • Once the company is functionally comparable, it cannot be rejected on the ground of difference in fixed assets to operating income, low employee cost etc. unless assessee demonstrates how these factors has impacted profitability and also quantifies the difference the profitability. 14. Further, Ld. AR submitted that Excel Infoways Ltd. cannot be taken as a comparable company for the following reasons: Covered by Hon'ble ITAT order for AY 2012-13 • The Hon'ble ITAT in the Assessee Company's own case for AY 2012-13 has rejected Excel Infoways Ltd. The said decision is squarely applicable to this case, as the DRP too has merely relied on its order for AY 2012-13. Fails TPO's own filter of 75% export earnings: • Foreign exchange earnings of Excel Infoways Ltd. is 21.77% which is less than 75% of the total sales, hence fails the filter adopted by the TPO. (Refer Handy Document-3) Widely fluctuating margins: • Excel Infoways cannot be considered as a comparable company du....
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....cost, the ratio is 37.11% whereas that of the Assessee is 75.81%. Thus clearly indicating difference in functional profile, may be due to outsourcing. • Excel Infoways has two business segments i.e. IT/BPO segment and infra segment. Infra Segment accounts for 75% of Excel's total revenue. Segmental details are provided in the Annual report but no bifurcation or break up of employee cost has been provided. In the absence of such details, the contention of the DRP in the previous year that bulk of the employee cost is attributable to ITeS is unreliable • Further, merely because IT/BPO segment is employee oriented, it does not mean that the infra segment did not incur employee cost or incurred very less employee cost. Thus, a company having such low employee cost to total operating cost ratio (6.67%) cannot be said to be comparable, in the absence of employee cost break up for IT/BPO segment. Difference in asset profile: • Fixed asset turnover ratio of excel Infoways Ltd. is 104.65% which is substantially higher than the Assessee 11.80%. thus demonstrating difference in asset profile. (Refer Handy document -4) Differenc....
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....orward losses against the income of current year, Ld. AR submitted that the Assessee claimed set off of brought forward losses amounting Rs. 16,51,19,294/-. Ld. AR further submitted that AO disallowed brought forward losses on the ground that on perusal of assessment order passed for the earlier years, total loss available for set off in the current year is NIL. 19. She brought to our notice the submission of assessee before Ld. DRP that the assessee is eligible to claim the setoff of the brought forward losses & unabsorbed depreciation amounting to Rs. 16,51,19,294/- as the Assessee has disputed the adjustment made by DRP/AO in AY 2009-10 & 2012-13. She further submitted, DRP did not considered the objections filed by assessee and merely relied on the draft order. Further, she brought to our notice the chart as under:- Assessment Year Business Losses Unabsorbed Depreciation Total 2008-09 - 3,63,968 3,63,968 2009-10 - 1,07,29,670 1,07,29,670 2010-11 - 4,33,84,991 4,33,84,991 2011-12 4,95,38,284 6,11,02,381 11,50,84,385 TOTAL 4,95,38,284 11,55,81,010 16,95,63,014 20. She submitted that as per the below ....
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....orce intensive as compare to infra activity. Therefore, allocation of manpower expenses on the basis of ITeS/BPO segment and infra segment is not correct. On asset turnover ratio, the DRP concluded that once company is functionally comparable, is cannot be rejected on the ground of difference of fixed asset to operating income, low employee cost, unless the assessee demonstrate how these factors have impacted profitability and also quantify the difference in profitability. The ld. AR of the assessee vehemently submitted that this comparable cannot be comparable as its Director were considering closing of its ITeS/BPO segment and diversify in new area of construction, development of property and real estate. The ld. AR also demonstrated that the fluctuating margin of this comparable in different Financial Year in the following manner: Financial Year OP/TC (%) Revenue (Rs.) 2008-09 247.74% 1,86,040.74 2009-10 267.31% 2,04,161.34 2010-11 238.71% 2,03,526.40 2011-12 41.48% 79,096.95 2012-13 75.70% 76,098.54 20013-14 30% 52,972.12 2014-15 2% 22,994.38 17. The ld. AR for the assessee strong....
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.....e. Excel Infoways Limited, because of different factors and also fluctuating to be excluded from final set of comparables. Accordingly, we h ld The Assessing Officer is directed to recompute mean margin of the comparables and determine ALP of the international transactions of provision of Oracle support services (ITes) by the assessee to its AEs after affording reasonable opportunity of hearing to the assessee. Thus, ground No. 3 raised in appeal by assessee is allowed." In the case of Excel Infoways Limited, a chart provided before us wherein we have seen that there is fluctuating profit margins and IT(TP)A No. 2299/Mum/2017 following the same parity of reasoning, Excel Infoways Limited because of fluctuating profit margin, is to be excluded from the final set of comparables. 13. Further, the TPO has applied diminishing revenue filter to exclude the companies from the comparable set whereas, the revenue of Excel Infoways Limited also clearly demonstrated diminishing revenue trend. In such situation, we refer to the decision of Co-ordinate Bench of the Tribunal, Delhi in the case of Baxter India Pvt. Ltd. Vs. ACIT (supra.) where the Tribunal has held as follows: ....
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.... find he has obtained the employee cost and the sale for the 1TES segment by exercise of his powers u/s. 133(6), wherein the said company has allocated entire employee cost to IT - BPO segment with no allocation to Infra Activity segment which accounts to 49% of Excels total revenue. In our opinion, it is highly impractical that no employee has been hired by Excel for Infra Activity segment. We, therefore, find merit in the argument of the Id. counsel for the assessee that the information provided as per section 133(6) by Excel Infoways Ltd. is unreliable and should not be used to compute employee cost for ITES segment The Delhi Bench of the Tribunal in the case of Motorola Solutions India Private Limited vide ITA No.5637/Del/2011 has held that a company should be rejected as comparable in case there is contradiction in the facts or data sourced from annual report and as per the information gathered u/s. 133(6). In view of above discussion, we hold that Excel Infoways Ltd. cannot be considered as comparable and should be excluded from the list of comparables. We hold and direct accordingly." Therefore, it is examined that both, Universal Print Systems Limited and Excel Inf....
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....axter India (P) Ltd was also AY 2012-13. The relevant observations are contained in Para 24 and 25 of the said order and are being reproduced for a ready reference: "24. So far as exclusion of Excel Infoways Ltd. is concerned, we also find merit in the submissions of the ld. Counsel for the assessee that the above company should be excluded from the list of comparables. This company fails TPO's own filter of diminishing revenue and abnormal volatility in revenue and margins. We find from the order of the TPO at para 7.5 (page 24 - 25 of the TPO order) where the TPO has observed that the department has applied consistent diminishing revenue/loss making filter wherein the companies with losses/diminishing revenue for the last three years upto and including the financial year 2010-11 were rejected as comparables. The department has excluded such companies with consistent losses/diminishing revenue in an environment where Indian economy is growing at consistent rate. Having held so, the Assessing Officer included Excel Infoways Ltd. as a comparable without considering the fact that the said company does not pass the diminishing revenue filter. From the submissions of the a....