TaxTMI 
TaxTMI 
2022 (1) TMI 1275
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....ice charged was lower than arm's length price determined for Information Technology Enabled Services ('ITeS') rendered by Appellant to its AE(s); 3. Learned AO / TPO / DRP erred, in law and facts, by not accepting economic analysis undertaken by Appellant in accordance with the provisions of the Act read with the Rules, and in conducting a fresh economic analysis for the determination of the ALP in connection with the impugned international transactions and holding that the Appellant's international transactions are not at arm's length; 4. Learned AO / TPO / DRP have erred, in law and facts, by rejecting certain comparable companies following different accounting year (i.e. companies following accounting year other than March 31); 5. Learned AO / TPO / DRP have erred in law and facts, by applying employee cost greater than 25% of the total operating cost as a comparability criterion; 6. Learned AO / TPO / DRP have erred, in law and facts, in application of filter i.e. by rejecting companies whose export services income is less than 75% of turnover for the purpose of selection of comparable companies; 7 Learned AO / TP....
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....ound to be comparable/not comparable for any reasons, appellant craves leave to urge the same at the time of hearing. 12. Learned AO / TPO erred, in law and facts, by wrongly computing operating margins of some of the comparable companies considered in the TP order; 13. Learned AO / TPO / DRP erred, in law and facts, by not making suitable adjustment to account for differences in working capital position of the Appellant vis-à-vis the comparables; 14. Learned AO / TPO / DRP erred, in law and facts, by not making suitable adjustments on account of differences in the risk profile of the Appellant vis-6-vis the comparables, while conducting comparability analysis; 15. Learned AO / TPO / DRP have erred, in law and facts, by recharacterizing certain trade receivables as unsecured loans, not appropriately considering the nature and characteristics of the transaction and computing notional interest on such trade receivables; 16. Learned AO / TPO / DRP have erred, in law and facts, by not appreciating that the working capital adjustment undertaken by the Appellant in its Transfer Pricing documentation would take into consideration impact ....
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..... 187 ITR 688 (SC) Ahmedabad Electricity Co. Ltd. 199 ITR 351 (Born) FB) 3. We have heard both the parties on the admission of additional grounds and following the Hon'ble Supreme Court judgment in the case of M/s National Thermal Power Co. Ltd. Vs. CIT, 229 ITR 383 (SC), the additional grounds are admitted for adjudication. 4. The assessee company renders contract IT enabled back office services to the Swiss Re Group entities across the globe. It provides IT enabled back office services such as contract administration, claims administration and technical reinsurance accounting support (for property and casualty reinsurance and life & health reinsurance). The assessee has also entered into agreements with Swiss Re companies for rendering remote data processing in the field of reinsurance. The functions performed by the taxpayer and its AE in relation the back office support services provided by the taxpayer to the AE are Strategic Management functions, Administrative Services , Contracting with customers, Specification/requirement analysis, Project Management and Performance/ Quality control uses the routine tangible assets for its business operations. The assessee does not o....
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....only the grounds of appeal with regard to exclusion of the companies viz., Infosys BPM Ltd. and Eclerx Services Ltd. and inclusion of Sundaram Business Services Ltd., ACE Software Exports Ltd. & Hartron Communication Ltd. (addl. ground). Exclusion of comparables 11. The ld. AR submitted that Infosys BPM Ltd. should be rejected as a comparable because it is functionally not comparable, has diversified activities and lack of segmental data, different business model, brand profits, various revenue models, presence of intangibles, outsourcing costs, marketing expenses and turnover. It offers business outsourcing solutions to several clients and span across multiple industry segments. The company's catering to a variety of industries does not change the nature of functions carried out as it is committed to provide best in class services to both horizontal and vertical focus areas. 12. The DRP was of the view that just because the company is providing cloud based services over various mainframe computers, the company would not be functionally different as claimed by the assessee and rejected this plea of the assessee. 13. Regarding the plea of the assessee that this company ....
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....ficant intangibles and brand and hence not functionally comparable. The DRP noted that the expenditure incurred towards brand was just Rs.19 crore which is meagre considering its operating revenue of Rs.3050 crores. Further, the assessee could not point to any information from the annual report to indicate brand has contributed to the revenue growth or profitability. Therefore, the presence of brand, as such, has not affected comparability. Further, there is no information in the annual report to indicate that the company has undertaken any major R&D initiatives & own intangibles. Therefore, the presence of intangible in the form of goodwill, which is also insignificant, as the value is only Rs.19 crore compared to the revenue from operations of Rs.3050 crores do not have any impact on the profits of the company. Hence, these pleas were rejected by the DRP. 18. The assessee's contention that this comparable has incurred significant selling and marketing expense was also not accepted by the DRP, since from the perusal of the annual report, the DRP noted that the expenses on this count is only 4.56% of the total expenditure and which is not at all significant to affect the profita....
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....f wholly owned subsidiary Agilyst Consulting Pvt Limited has taken place with effect from 1.4.2015, the DR[ observed that the assessee has not demonstrated any increase in profits due to this amalgamation. Therefore, this amalgamation has no impact on comparability. Accordingly, the plea was rejected. 24. With regard to acquisition resulting in inorganic growth, the DRP noted that the company has acquired entire shareholding of CLX Europe SPA, Italy, as on 22"d April 2015 and this acquisition was made by the company's overseas subsidiary eClerx Investments (UK) Ltd. Therefore, there is no merit of the objection, as the stand alone financials of this company are considered for comparability. 25. The assessee also raised the objection that there is increase in revenue, but according to the DRP, it has failed to bring on record any evidence to suggest that this abnormal inorganic growth has impacted the profit margin of the company. It is observed that the profit margin of this company has been consistently at the same level during the last few years. The ALP margin is determined with reference the average profit margin of a comparable for three years and also taking into ac....
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..... In view of the above order of the Tribunal, we are inclined to direct that Eclerx Services Ltd. be excluded from the list of comparables. Inclusion of comparables 31. Regarding inclusion of Sundaram Business Services Ltd., and Ace Software Exports Ltd., the DRP was of the view that the that the TPO is justified in excluding companies making persistent losses as comparable. The ITAT, Mumbai in the case of Advance Power Display Systems Limited vs. AC1T and Sumitomo chemicals held that persistent loss-making company cannot be considered as good comparable for the purpose of determining ALP. The ITAT, Hyderabad in the case of Brigade Global Services Private Limited vs. ITO held that in case there is continuous loss year by year, in such a situation, that company's data cannot be considered as comparable. In the case of Sony 'India Private Limited, the Hon'ble ITAT in regard to the comparable Godrej Ltd noted that the huge losses suffered by the company over a period of several years would be a significant factor to justify exclusion of the said company as comparable. The ITAT, Delhi in the case of CRM Services India Private Limited (2011-T11-86-ITAT-Del- TP), observ....
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....nal held as under:- "23. Ground No. 14-17 alleged by assessee against adjustment of notional interest on outstanding receivables. From TP study, it is observed that payments to assessee are not contingent upon payment received by AEs from their respective customers. Further Ld.AR 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. 23.1. Ld.TPO computed interest on outstanding receivables under weighted average method using LIBOR + 300 basis points applicable for year under consideration that worked out to 3.3758% on receivables that exceeded 30 days. It has been argued by Ld.AR that authorities below disregarded business/commercial arrangement between the assessee and its AE's, by holding outstanding receivables to be an independent international transaction. 23.2. Ld.AR placed reliance on decision of Delhi Tribunal in Kusum Healthcare (P.) Ltd. v. Asstt. CIT [2015] 62 tax....
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....during 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/non-payment 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 v. Patni Computer Systems Ltd. [2013] 33 taxmann.com 3/215 Taxman 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 ente....
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.... "There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which would have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the assessee would have to be studied. It went on to hold that, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis-a-vis the receivables for the supplies made to an AE, the arrangement reflected an international transaction intended to benefit the AE in some way. Similar matter once again came up for consideration before the Hon'ble Delhi High Court in Avenue Asia Advisors Pvt. Ltd v. DCIT [2017] 398 ITR 120 (Del). Following the earlier decision in Kusum Healthcare (supra), it was observed that there are several factors which need to be considered before holding that every receivable is an international transaction and it requires an assessment on the working capital of the assessee. Applying the decision in Kusum Health Care (supra), the Hon'ble High Court directed the TPO to study the impact of the receivables appearing in th....