TaxTMI 
TaxTMI 
2019 (2) TMI 1915
X X X X Extracts X X X X
X X X X Extracts X X X X
....td., provides business process outsourcing (BPO) services in the healthcare, insurance, banking and financial services verticals. These services have been characterized by the assessee as being in the nature of Information Technology Enabled Services (ITES). 2.2 For Assessment Year 2010-11, the year under consideration in these appeals, the assessee filed its return of income on 08.10.2010 declaring a loss of Rs. 30,09,405/- after claiming deduction of Rs. 2,31,68,912/- under section 10A of the Act. The return was processed u/s 143(1) of the Act and the case was taken up for scrutiny for this 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 Associated Enterprises (AE). The TPO passed an order under section 92CA of the Act on 29.01.2014 proposing an adjustment of Rs. 3,69,85,888/- in respect of the international transactions entered into by the assessee in its ITES segment. After receipt of the TPO's order, the AO passed the draft order of assessment under section 143(3) rw.s. 144C of t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rom AEs in absence of debtors and inventory in the case of assessee for calculating the cost of working capital built in the profit margin. 5. On the facts and in the circumstances of the case the Dispute Resolution Panel is not justified in directing the TPO to adjust the profit margin of the assessee for the entire amount of advances received from AE on the ground that there is time value for money. 6. On the facts and in the circumstances of the case the Dispute Resolution Panel erred in directing the TPO/AO to exclude the comparable M/s Acropetal Technologies Ltd., by applying new filter i.e Employee Cost filter in ITES Segment, without appreciating the fact that the direction actually amounts to setting aside of the draft order, which is beyond the mandate given to DRP vide provisions by Section 144C(8). 7. On the facts and in the circumstances of the case the Dispute Resolution Panel erred in directing the TPO/AO to exclude the comparable M/s ICRA Online Ltd & M/s Sundaram Business Services Ltd. by applying new filter i.e 75% Export filter in ITES segment, without appreciating the fact that the direction actually amounts to setting aside of the draft order, which is ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ure of the international transactions with the AEs. 5. The learned AO, TPO and the Honble DRP erred in rejecting the TP documentation maintained by the Appellant on invoking provisions of sub-section (3) of 92C of the Act contending that the information or data used in the computation of the arm's length price is not reliable or correct. 6. The learned AO, TPO and the Hon'ble DRP have erred in rejecting the need for use of multiple year data of the companies selected as comparable in determination of arm's length price. 7. The learned AO, TPO and the Hon'ble DRP have erred in rejecting the application of upper turnover filter for selection/ rejection of companies as comparable. 8. The learned AO, TPO and the Hon'ble DRP have erred in rejecting companies selected as comparable by the Appellant in the TP documentation and in selecting/ introducing companies which are not comparable to the Appellant by conducting a fresh economic analysis during the transfer pricing assessment proceedings.. 9. The learned AO, TPO and the Hon'ble DRP have erred in applying the filter of export earnings less than 75% of the total revenue to select/ reject companies....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nuation to the existing ground of appeal and be read as Ground No. 10.1, Ground No. 11.1, Ground No. 15 & Ground No. 16. Ground No. 10.1: Wrong Computation of net margin on cost of Jeevan Scientific Technology Limited ("Jeevan Scientific") The Appellant submits that the learned TPO/DRP has erred in wrongly computing the net margin on cost of Jeevan Scientific. Reason for filing Additional Ground of Appeal The Appellant humbly submits that though a ground for rejection of Jeevan Scientific has been taken in the Form - 36B, the Appellant is filing a without prejudice argument of wrong computation of margin of Jeevan Scientific by the Id. TPO/DRP. Accordingly, the Appellant humbly submits that without prejudice to the ground that the Jeevan Scientific should be rejected, the Id. TPO/DRP has wrongly computed the net margin on cost of Jeevan Scientific. Ground No. 11.1: Companies to be accepted The Appellant submits that the Ld. TPO has erred in not including R systems International Limited which is functionally comparable to the Appellant. Reason for filing Additional Ground of Appeal The Appellant during the preparation of Form 36B has taken a ground on wron....
X X X X Extracts X X X X
X X X X Extracts X X X X
....-Additional Ground of Appeal It is most humbly prayed to the Hon'ble Tribunal to permit the Appellant to raise the following additional ground of appeal in continuation to the existing ground of appeal and be read as Ground No. 8.1. Ground No. 8.1: Accentia Technologies Limited ("Accentia") ought to be rejected from the list of comparable set proposed by the Learned Transfer Pricing Officer ("Ld. TPO") The Appellant submits that the Learned Assessing Officer ("Ld. AO")/Learned TPO ("Ld. TPO")/Learned Dispute Resolution Panel ("Ld. DRP") has erred in not rejecting Accentia as it is a functionally dissimilar company. Reason for filing Additional Ground of Appeal The Appellant during the preparation of Form 36B has taken a ground that during the transfer pricing assessment proceedings, the Ld. AO, Ld. TPO and Ld. DRP have erred in selecting/introducing certain companies which are not comparable to the Appellant by conducting a fresh economic analysis. However, in order to bring clarity on the existing ground no. 8 and based on recent jurisdictional tribunal ruling, we are elaborating the name of Accentia Technologies Limited which is sought for exclusion from the co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....chnology Ltd.(Seg.) 21.05% Average 26.86% 4.4 The TPO computed the ALP of the assessee's transactions in the ITES segment as under: This adjustment of Rs. 3,69,85,888/- was included by the AO in the draft order of assessment dated 11.03.2014. The assessee filed its objections thereto before the DRP which issued its directions under section 144C(5) of the Act on 11.12.2014, granting the assessee partial relief. Pursuant thereto, the AO passed the impugned final order of assessment dated 20.01.2015 determining the total income of the assessee at Rs. 1,20,65,687/- which included TP adjustment of Rs. 1,48,92,739/-. 5.1 Aggrieved by the final order of assessment dated 20.01.2015 for Assessment Year 2010-11, both Revenue and the assessee has filed cross appeals before the Tribunal. The assessee has also preferred Cross Objections (CO) vis-à-vis the said assessment order/Revenue's appeal. 5.2 Before us, the assessee had filed paper book and also filed a chart containing the comparables and short arguments on each one of them. The assessee has also filed a compendium of case laws, which have been considered while discussing the individual compara....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ning this company. 6.1.5 As regards the plea for inclusion of Sundaram Business Services Ltd., raised in ground No.15, it was submitted that the DRP has excluded this company unilaterally and Revenue is also in appeal against the exclusion of this company. 6.2 In view of the above submissions; those put forth in the assessee's letters dated 27.04.2017 and 18.09.2017, and also considering that all the additional grounds raised relate to the inclusion/exclusion of comparable companies and in view of the decision of the Hon'ble Punjab and Haryana High Court in the case of Quark Systems India Pvt. Ltd., in ITA No.594 of 2010, the additional grounds raised are admitted for consideration / adjudication, when the individual companies will be discussed in the subsequent paragraphs of this order. Revenue's Appeal in IT(TP)A No.404/Bang/2015 7. Ground Nos. 1, 10 and 11 are general in nature and since they do not call for adjudication, are dismissed as infructuous. 8. Ground Nos. 2 & 3 - Deduction u/s 10A of the Act 8.1 These grounds are raised on the issue of exclusion of expenditure from both the export turnover and total turnover for the purposes of computation of deducti....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... TP order, the assessee had raised objections before the DRP, which had issued directions that no such restriction shall be made on the working capital adjustment and it shall be granted as per actuals. As the working capital adjustment has been granted at actuals i.e., (-)1.40%, without making any restriction as contended by Revenue in the grounds of appeal, ground Nos. 4 and 5 raised on this issue are infructuous as they require no adjudication and are accordingly dismissed as infructuous. 10. Ground No.6 - Exclusion of M/s. Acropetal Technologies Ltd., (Acropetal) 10.1 In this ground (supra), Revenue contends that this company, 'Acropetal' has been excluded by DRP from the set of comparables by applying a new filter, namely, employee cost filter, which amounts to setting aside the draft order of assessment on this score, which is beyond the mandate given to the DRP by the provisions of section 144C(8) of the Act. 10.2 This company was selected by the TPO as a comparable company on the grounds that it is functionally similar to the assessee, despite the assessee's objection to the contrary. The assessee filed objections before the DRP for exclusion of this company on the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s employee cost is less that 25% and employee cost filter should be applied. 10.5.2 In this regard, it is seen that neither the assessee in its TP study nor the TPO has applied the on-site filter while determining the ALP. Similar is the case with employee cost filter; which has neither been applied by the assessee nor by the TPO while determining the ALP. As such the DRP has applied these filters suo moto. When new filters are applied, it is necessary to examine whether such an application of a new filter has any impact on the other companies about their inclusion or exclusion. It is also seen that the DRP has not rendered a finding on the functional comparability of 'Acropetal' even though a specific ground has been raised and the judicial decisions in this regard have been brought to the notice of the DRP. In view of the above, we deem it appropriate to remand the issue of comparability of Acropetal Technologies Ltd., back to the file of the TPO with a direction that the two filters i.e., on-site filter and employee cost filter, applied by the DRP suo moto, may be applied to the other comparable companies as well and functional capacity be decided in the light of the judicial....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., applying the 75% export earning filter suo moto is not tenable. Further, if any new filters are applied, it is imperative to examine whether the application of such a filter has any impact on the other companies about their inclusion or exclusion in the set of comparables. That 'ICRA' was not selected as a comparable by TPO's in other cases cannot be a valid ground for exclusion in this case also, unless the reasons for such exclusion in other cases are known. In view of the above, we deem it appropriate to remand the issue of comparability of this company i.e., ICRA Online Ltd., to the file of the TPO with the direction that the filter applied suo moto by the DRP in the case of 'ICRA' be applied to the entire set of comparable companies. 11.4 Sundaram Business Services Ltd., ('Sundaram') was selected as a comparable company by the TPO. The assessee had accepted the same and not objected to its inclusion before the DRP. The DRP had, suo moto, excluded this company 'Sundaram' from the set of comparables on the ground that it fails the 75% export earning filter. 11.4.1 Before us, the learned DR assailed the action of the DRP in suo moto introducing a new filter, which amounts....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ther the application thereof has any import on the other comparbles companies regarding their inclusion or exclusion from/into the final set of comparables. Since we have taken the stand that if any new filter is applied, it should be applied uniformly on the entire set of comparable companies, we deem it appropriate to remand the issue of comparablity of this company, Sundaram Business Services Ltd., back to the file of the TPO with a direction that the 75% export earning filter, applied, suo moto, by the DRP, be applied on the entire set of comparable companies. 12. Ground No.8 - Exclusion of Infosys BPO Ltd., (Infosys) 12.1 In this ground (supra), Revenue assails the order of the DRP in excluding this company 'Infosys' from the set of comparables. The TPO had selected this company, 'Infosys', as a comparable despite the assessee's objections to its inclusion as a comparable, on the ground that this company is, inter alia, functionally not comparable to the assessee. The DRP has directed exclusion of this company from the set of comparables on the ground that it has tremendous brand value attached to it which has a significant impact on its pricing and consequently on the m....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... taxmann.com 310/140 ITD 540 (Bang.) for Assessment Year 2007-08 is applicable to this year also. We are inclined to concur with the argument put forth by the assessee that Infosys BPO Ltd. is not functionally comparable since it has the benefit of market value as well as brand value. This company enjoys the benefits of scale and market leadership. In this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. It is ordered accordingly." 12.4.2 In view of the above, we find no reason to interfere with the order of the DRP and consequently the DRP's direction to exclude this company, 'Infosys' is upheld. Since this company, 'Infosys' is excluded on grounds of functional dissimilarity, the application of new filters by the DRP will have no bearing on its exclusion or inclusion as it would continue to remain excluded on grounds of functional comparability. Therefore, we find there is no need to remand the comparability of this company to the file of the TPO, as sought for by the learned DR. Consequently, ground No. 8 of Revenue's appeal is dismissed. 13. Ground No. 9 - Exclusion of Eclerx Services Ltd., 13.1 This company, 'Ecle....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... ITES. The relevant portion of the order at para 14.1 and 14.2 thereof is extracted hereunder: "E-clerx Services Limited. 14.1 We have considered the rival submissions and relevant record. At the out set, we note that the ..31-pparability of M/s Eclerx Services Ltd. has been examined by the Special Bench of the Tribunal in the case of Maersk Global Centres (India) (P.) Ltd. v. Asstt. C/T12014] 43 taxmann.com 100/147 ITD 83 (Mum.) (SB) in paras 82 and 83 as under: "82. In so far as M/s eClerx Services Limited is concerned, the relevant information is available in the form of annual report for financial year 2007-08 placed at page 166 to 183 of the paper book. A perusal of the same shows that the said company provides data analytics and data process solutions to some of the largest brands in the world and is recognized as experts in chosen markets-financial services and retail and manufacturing. It is claimed to be providing complete business solutions by combining people, process improvement and automation. It is claimed to have employed over 1500 domain specialists working for the clients. It is claimed that eClerx is a different company with industry specialized services ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... solutions in the nature of high end services. The nature and different field of services provided by this company clearly show that it is not functionally comparable with the ITES. Accordingly, we direct the TPO/AO to exclude this company from the set of comparables." 13.4.2 In view of the above, we find no infirmity in the order of the DRP and the direction of the DRP to exclude 'Eclerx Services Ltd.,' from the set of comparables is upheld, since this company 'Eclerx' is excluded on grounds of functional dissimilarity, the application of new filters by the DRP will have no bearing on its exclusion or inclusion as it would continue to remain excluded on grounds of functional comparability. Therefore, there is no need to remand the matter to the TPO, as sought for by the learned DR. Consequently ground No.9 of Revenue's appeal is dismissed. 14. In the result, Revenue's appeal for Assessment Year 2010-11 is partly allowed for statistical purposes. Assessee's appeal in IT(TP)A No.553/Bang/2015 for Assessment Year 2010-11 15. Ground Nos. 1 to 7 and 12 to 14 (supra) in assessee's appeal are general or conceptual or academic in nature and not pressed by the assessee before u....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ontention, he placed reliance on the Tribunal order rendered in the case of M/s. Flextronics Tech. (India) Pvt. Ltd. v. DCIT in IT(TP)A No.1559(B)/2012 dated 23.10,2015, copy available on page Nos.17 to 38 of compilation of case laws submitted before the Tribunal. (a) Accential Tech. Ltd. (Seg.) (b) Acropetal Tech. Ltd. (Seg.) (c) Coral Hubs Ltd. (d) Crossdomain Solutions Ltd. (e) Eclerx Services Ltd. (/) Genesys International Corpn. Ltd, (g) Mold Tek Technologies Ltd," We further note that the functional comparability has been examined in detailed by the co-ordinate bench of this Tribunal in the case of Equant Solutions India (P.) Ltd. v. Dy. CIT j2016] 157 ITD 292/66 taxmann.com 2 (Delhi - Trib.) as well as in the case of ITO v. Interwoven Software Services (India) (P.) Ltd. [2016] 74 taxmann.com 103 (Bang. - Trib.). Further in the case of Acropetal Technologies Ltd. (Seg.), the co-ordinate bench of this Tribunal in the case of Kodiak Networks (India) Pvt. Ltd. v. Dy. CIT [IT(TP)A No.1540 (Bang) of 2012] has considered the functional comparability and found that this company is not comparable with a captive service provid r. Accordingly we direct the Asses....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lied, it is necessary to examine whether such an application of a new filter has any impact on the inclusion or exclusion of other companies. In view of the above, we deem it appropriate to remand the issue of comparability of this company back to the file of the TPO with the direction that the new filters applied suo moto may be applied on the other comparable companies as well and then the inclusion/exclusion of this company as a comparable be decided. 19. Ground No.11 Exclusion of companies with different financial year ending R Systems International Ltd., Additional Ground No.11.1 19.1 In these grounds/additional ground (supra), the assessee has assailed the exclusion of companies from the list of comparables which have different financial year ending; and specifically exclusion of M/s. R Systems International Ltd. The TPO has applied the filter of different financial year to, inter alia, exclude R. Systems International Ltd. It was submitted by the learned AR of the assessee that the Hon'ble Punjab and Haryana High Court in the case of CIT Vs. Mercer Consulting Pvt. Ltd., in its order in ITA No.101 of 2015 dated 24.08.2016 has held that a company need not be exclud....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y the assessee in the return of income. It is submitted that the AO may be directed to examine and allow the assessee's claim. 21.2 We have considered the assessee's submissions/contentions in this regard. The AO is directed to examine and verify the assessee's claims / contentions in respect of the incorrect computation of its eligible quantum of deduction u/s 10A of the Act in accordance with law. 22. Ground No. 16 - Short Credit for TDS 22.1 In this ground, the assessee contends that the AO has erred in giving it credit for TDS of Rs. 45,81,414/- instead of Rs. 52,24,877/- claimed. The AO directed to examine and verity the assessee's claim in respect of grant of short credit for TDS in accordance with law. 23. Ground No. 17 - Charging of interest u/s 234D of the Act 23.1 In this ground (supra), the assessee denies himself liable to be charged interest u/s 234D of the Act. The charging of interest is consequential and mandatory and the AO has no discretion in the matter. This proposition has been upheld by the Hon'ble Apex Court in the case of Anjum H. Ghaswala (252 ITR 1) (SC) and I, therefore, uphold the action of the AO in charging the assessee the aforesaid int....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bove, the Hon'ble DRP has erred in not adjudicating on the other grounds pertaining to the application of the upper turnover filter and extraordinary events of amalgamation/acquisitions during the year raised by the Assessee, in the case of E-Clerx. 26.2 At the Bar, the learned AR for the assessee submitted that the assessee is not pressing the C.O. In these circumstances, the grounds raised by the assessee in the C.O. are rendered infructuous and the C.O. is dismissed as not pressed. 27. In the result, assessee's C.O. for AY 2010-11 is dismissed. To sum up, Assessee's appeal for AY 2010-11 and Revenue's cross appeals are partly allowed and cross objections filed by the assessee are dismissed. Pronounced in the open court on 13th February, 2019. ============= Document 1 Arm's Length Mean Margin on cost Less: Working Capital Adjustment Adjusted margin (As per Annex. C) Operating Cost Arms Length Price (ALP) Price Received Shortfall being adjustment u/s 92CA: 26.86% -1.40% 28.26% Rs. 21,24,34,127 128.26% of operating cost Rs. 27,24,68,011 Rs. 23,54,82,123 Rs. 3,69,85,888 Document 2 Re: R.Systems International Limited....