TaxTMI 
TaxTMI 
2019 (8) TMI 1664
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....d by the Appellant by invoking provisions of sub-section (3) of 92C of the Act. 3. The learned AO/learned TPO/Hon'ble CIT(A) has erred in rejecting comparability analysis carried in the TP documentation and in conducting a fresh comparability analysis by introducing various filters while determining the Arm's Length Price ("ALP"). 4. IT Enabled Services ("ITeS") Segment: 4.1 The learned AO/learned TPO/Hon'ble CIT(A) has erred in not considering the previous two years financial data of the comparable companies while determining the ALP. 4.2 The learned AO/learned TPO/Hon'ble CIT(A) has erred in not applying the upper limit on turnover while selecting the comparable companies. 4.3 The learned AO/learned TPO/Hon'ble CIT(A) has erred in applying different financial year ending filter while selecting the comparable companies. 4.4 The learned AO/learned TPO/Hon'ble CIT(A) has erred in completely relying on the unaudited data requisitioned and consequently obtained by taking recourse to the provisions of Section 133(6) of the Act. 4.5 The learned AO/learned TPO/Hon'ble CIT(A) has erred in applying export earning filter of 75% instead of 25% of the....
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....account of interest on such outstanding amounts. 5.5 The learned CIT(A) has erred in ignoring the fact that the credit period provided in relation to outstanding receivables as on 31 March 2012 to Non-AEs are greater than that of AEs. 5.6 Without prejudice to the argument of the Appellant in Ground No. 4.9 above, the learned AO/learned TPO/learned CIT(A) has erred in imputing the interest on receivable outstanding as 31 March 2012 when the learned TPO had already done the negative working capital adjustment to the companies proposed as comparable by adjusting the difference in the credit period between the Appellant and those comparables. 5.7 Without prejudice to the argument of the Appellant in Ground No. 4. 9, the learned AO/learned TPO/learned CIT(A) has erred in imputing the interest on receivable balances specifically arising out of provision of software development services by Indecomm India when the learned TPO post considering the working capital adjusted margins of comparable companies had already concluded the operating margin of Indecomm India with respect to such services is at arm's length. 6. The learned AO has erred in in levying interest u/s. 234B Sectio....
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....k fresh search by applying various filters and shortlisted following 10 comparables with an average margin of 28.11%: # Company Name 1. Accentia Technologies Ltd. 11.75% 2. Universal Print Systems Ltd. 52.46% 3. Informed Technologies Ltd. 6.08% 4. Infosys BPO Ltd. 36.30% 5. Jindal Intellicom Ltd. -0.05% 6. Microgenetic Systems Ltd. 19.61% 7. TCS E-Service Ltd. 63.69% 8. BNR Udyog Ltd. 41.58% 9. Excel Infoways Ltd. 29.79% 10. E4E Healthcare Services Pvt. Ltd. 19.85% AVERAGE 28.11% He thus proposed an adjustment of Rs. 2,74,17,877/- under ITeS. 2.3. Ld. TPO further computed interest on receivables exceeding 6 months at 16.85% and proposed adjustment being interest chargeable at Rs. 39,72,148/-. Thus total adjustment proposed by Ld. TPO was as under ITES Rs. 2,74,17,877/- Interest chargeable Rs. 39,72,148/- Total adjustment Rs. 3,13,90,025/- 3. Aggrieved by proposed adjustment, assessee preferred appeal before Ld. CIT(A) who upheld view of Ld. TPO. 4. Aggrieved by order of Ld. CIT(A) assessee is in appeal before us now. Ld. AR submitted that Ground No. 1-3 are general in nature and ther....
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....or rendering services, reliability of customers, fluctuations in demand etc. The primary risk market lies with the AE, as it is responsible for providing final services to end customer. Assessee is though responsible for quality of services to be delivered to its AE and has to meet specifications laid down by AE in the work order, however AE bears final responsibility of quality of services towards the client. Thus, it has been submitted that assessee do not even bear any service risk. Thus assessee has been characterised under this segment as a contract service provider rendering routine back office services and bearing minimal risk with assured returns from its AE. Based upon the above FAR analysis of assessee, we shall consider comparables alleged by assessee for exclusion/inclusion. Comparables sought to be excluded: 1. Universal Print Systems Ltd. (segmental) (BPO) Assessee sought to exclude this comparable for the reason that, it fails employee cost filter and has insufficient company information. It is also been submitted that, functionally this company is providing integrated print solution to its customers and does not provides routine ITeS services like that of asses....
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.... at 59.40% was wrong and unallocated costs as per the annual report should be allocated to BPO segment and if that is done then the OP/TC of this company will be only 51.80%. The Assessee further pointed out (Page 764 of paper book) that the TPO had applied revenue filter of more than 75% being from non-financial service income. The Assessee pointed out that the percentage of income from ITES was only 21.63% of the total revenue from operations of this company as per its annual report. The Assessee also pointed out that in the Pre-press BPO segment this company was providing integrated print solutions to its customers, which includes scanning, design/layout, trapping, hand-outlined clipping path and image masking and magazine and catalogue publishing. The Assessee submitted that the aforesaid services are not in the nature of ITES. The Assessee pointed out that as per the safe harbour rules introduced by the CBDT ITES has been defined as business process outsourcing services provided mainly with the assistance or use of information technology. It was also submitted that this company does not satisfy the definition of ITES as contained in Rule IOTA(e) of the Rules. Since use of info....
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.... needs to be seen. The same reads as follows: "10B. (1) For the purposes, of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely:-- (a) to (d) (e) transactional-margin method, by which, (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (if) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affec....
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....argued that when the TPO himself applied the filters at the entity level he was not entitled to apply the filters at segmental level. As we have already stated if clear segmental information is available the filters can be applied at the segmental level in TNMM. Therefore the objection with regard to this company failing the employee cost filter and service revenue filter in our view was rightly rejected by the TPO and DRP. It is however seen that this company has four segments viz., Repro. Label Printing, Offset Printing and Pre-press BPO. Whether the label printing and offset printing segments supplement the functions performed in the Prepress BPO segment has to be seen. We therefore set aside the order of the DRP in this regard and remand for fresh consideration by the TPO the comparability of this company. In terms of Rule 10B(3) of the rules the profit margins of Pre-Press BPO have to be adjusted taking into account the fact that two other segments supplement the prepress BPO segment. If such adjustment cannot be reasonably or accurately made then this company has to be excluded from the list of comparable companies. The TPO for this purpose can use his powers u/s. 133(6) of t....
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....ng reasons:- "23. In so far as exclusion of Infosys BPO Ltd. is concerned, we find from the submissions made by the assessee before the Assessing Officer/TPO/DRP is that Infosys BPO Ltd. is predominantly into areas like Insurance, Banking, Financial Services, Manufacturing and Telecom which are in the niche areas, unlike the assessee. Further it was also submitted that the Infosys BPQ Ltd. comprises brand value which will tend to influence its business operation and the pricing policy thereby directly impacting the margins earned by the Infosys BPO Ltd.. We find the submissions of the ld. counsel for the assessee before TPO/DRP that in order to maintain the brand image of Infosys BPQ Ltd. in the market, the company incurs substantial selling and marketing expenditure whereas the assessee being a contract service provider does not incur such expenses to maintain its brand has not been controverted by them. Further, Infosys BPO Ltd. being a subsidiary of Infosys has an element of brand value associated with it. This can be further confirmed by the presence of brand related expenses incurred by Infosys BPO Ltd. Further, Infosys BPO Ltd. has acquired Australian based company M/s. Por....
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....eported in (2019) 101 taxman.com 292, by observing as under: "11.3 We have heard rival submissions and perused material on record. The issue of comparability of this company was considered by the co-ordinate bench of Tribunal in the case of XL Health Corpn. India (P.) Ltd. (supra). The relevant findings of the Tribunal are as under: "... We have heard the rival submissions and perused the material on record. From the perusal of the Annual Report of this entity placed at page Nos. 583 to 678 of paper book, at page No. 604 it is stated as under. "2. COMPANY OVERVIEW Your Company, along with its subsidiary companies - TCS e-Serve International Limited and TCS e-Serve America Inc., is primarily engaged in the business of providing Business Process Services (BPO) for its customers in Banking, Financial Services and Insurance domain. The Company's operations include delivering core business processing services, analytics & insights (KPO) and support services for both data and voice processes. Your Company is an integral part of the Tata Consultancy Services' (TCS) strategy to build on its 'Full Services Offerings' that offer global customers an integrated port....
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....by graduates who are trained to understand and speak English. There is no value addition in the services rendered by people in medical transcription. To our understanding, basically these people who carry out medical transcription services are trained to understand language spoken by doctors, outside India to whom medical reports of patience are sent for expert opinion. Medical transcriptionist simply reproduces opinion expressed by Doctor, which is then communicated to the patients. It is observed from annual report placed at page 223 of paper book (Index to Annual Reports) that this company has segmental information of medical transcription and revenue earned under this segment is Rs. 147.40 Lacs. It is also been observed that various other decisions by co-ordinate Benches of this tribunal has remanded this comparable back to Ld. TPO, for proper analysis and fresh consideration. We draw support for same from Indegene (P) Ltd. vs. ACIT reported in (2017) 85 Taxmann.com 60, wherein it has been held as under: "9.3.1. We have heard the rival contentions and perused and carefully considered the material on record including the judicial pronouncements cited. From the details on reco....
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....ccounting Policies reported at page 308 of paper book, it is observed that these companies operating businesses are organized and managed separately, according to nature of business and services provided with each segment, representing different strategic business unit. Note 15 at page 312 to refers to revenues from operations under the head information technology/BPO related services separately. It is observed that the function performed by this company as reported at page 285 reveals that it is engaged in business of providing customer care services and handling client business relations on their behalf by maintaining relation with customers and also providing services by assisting in managing the workflow and updating the records. It is observed that this Tribunal in case of Zyme Solutions Pvt. Ltd., vs. ACIT vide order dated 28/06/19 in ITA (TP) a No. 1661/Bang/2016, this comparable is excluded by observing as under: "The third and last company that is sought to be excluded from the list of comparable companies is Exclusion of Excel Info Ltd. The Tribunal had retained this company as a comparable company in its original order. The assessee sought exclusion of this company on ....
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....d decision, we direct exclusion of the aforesaid company from the list of comparable companies chosen by the TPO. It is observed from order passed by Ld. TPO at page 10 that assessee objected this company that employee cost filter being more than 25% has not been examined by Ld. TPO. It is observed that in decision of coordinate bench of Delhi Tribunal in case of Baxter India Pvt. Ltd. vs. ACIT reported in (2017) 85 Taxmann.com 285 this comparable failing employee cost filter has been analyzed as under: "Further, from the order of the TPO we find he has obtained the employee cost and the sale for the ITES 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 Excel's 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 Ld. 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 employ ee cost for ITES segment. The Delhi Bench of t....
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....ity as per law to represent its case. Accordingly we set aside this comparable back to Ld. TPO Accordingly grounds 4-4.10 stands allowed as indicated above. Ground 5-5.7 is in respect of interest on receivables outstanding amounting to Rs. 36,33,20,298/- in relation to transaction with AE. From TP study, it is observed that payments to assessee are not contingent upon payment received by AEs from their respective customers. Further Ld. Counsel submitted that working capital adjustment undertaken by assessee includes the adjustment regarding the receivables and thus receivables arising out of such transaction have already been accounted for. Alternatively, he submitted that working capital subsumes sundry creditors and therefore separate addition is not called for. Ld. TPO computed interest on outstanding receivables at the rate equal to 13.85 % PLR (SBI base rate) +300 basis points. It has been argued by Ld. Counsel that authorities below disregarded business/commercial arrangement between the assessee and its AE's, by holding outstanding receivables to be an independent international transaction. Ld. Counsel placed reliance on decision of Delhi Tribunal in Kusum Healthca....
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....ing course of business is an international transaction, he submitted that any delay in realization of same needs to be considered within transfer pricing adjustment, on account of interest income short charged or uncharged. It was argued that insertion of Explanation with retrospective effect covers Assessment Year under consideration and hence under/nonpayment of interest by AEs on debt arising during course of business becomes international transactions, calling for computing its ALP. He referred to decision of Delhi Tribunal in Ameriprise (supra), in which this issue has been discussed at length and eventually interest on trade receivables has been held to be an international transaction. Referring to discussion in said order, it was stated that Hon'ble Delhi Bench in this case noted a decision of the Hon'ble Bombay High Court in the case of CIT vs. Patni Computer Systems Ltd., (2013) 215 Taxmann 108 (Bom.), which dealt with question of law: (c) 'Whether on the facts and circumstances of the case and in law, the Tribunal did not err in holding that the loss suffered by the assessee by allowing excess period of credit to the associated enterprises without charging a....