AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2022 (11) TMI 1139
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....ts Associate Enterprises (AEs). The Assessing Officer (AO) referred the matter to the TPO to determine the Arm's Length Price (ALP) of the international transactions undertaken by the assessee with its AEs. The Transfer Pricing Officer (TPO) passed an order u/s. 92CA of the I.T. Act on 24.10.2019 suggesting the transfer pricing adjustment of Rs. 64,81,44,230 in respect of the international transactions entered by the assessee with its AEs during the previous year. The draft assessment order was passed on 16.12.2019 incorporating the above transfer pricing adjustment suggested by the TPO and also making corporate tax addition to the extent of Rs. 7,28,99,000 (disallowance u/s. 37 of the I.T. Act). 3. Aggrieved by the draft assessment order, the assessee filed objections before the Dispute Resolution Panel (DRP). The DRP vide order dated 25.02.2021 granted partial relief to the assessee, whereby the transfer pricing adjustment was reduced to Rs. 30,29,80,250. The DRP, however, confirmed the A.O.'s view on corporate tax disallowance. Pursuant to the DRP's directions, the impugned final assessment order was passed on 30.03.2021 computing the total income as under:- Co....
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....vely used for the purpose of business in India. 2.4. The learned AO and Honorable DRP has erred in law and on facts by not appreciating that the difference between the market value and the purchase price of shares is being taxed as perquisite in the hands of the employees. 2.5. The Learned AO and Honorable DRP has erred in law and on facts, in disregarding the sample debit note/invoices, Employee listing, Sample Form 16, cost reimbursement agreement, sample RSU agreement and scheme document submitted during the DRP proceedings by the Appellant. 2.6. The Learned AO and Honorable DRP has erred in law and on facts, in considering the ESOP expenditure as fictitious expenditure and making false allegation that the ESOP expenditure is a colorable device adopted for avoidance of tax which is totally inappropriate and misdirected. Further, learned AO/Honorable DRP has considered the ESOP cross charge by the Ultimate holding company as fictional and notional in nature which is totally misplaced. 2.7. The Honorable DRP has erred in law and on facts by placing reliance on the case laws decided in different context and not applicable to the facts of the Appe....
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....ent by stating that in one hand there is an element of income included in the reimbursement made to the Ultimate Holding Company for the expenditure on ESOP whereas on the other hand the learned AO states that the said expenditure is notional/fictitious in nature. 3. Other Corporate Tax related grounds 3.1. The learned AO have erred in law and on facts, in not granting deduction in respect of amount paid towards leave encashment INR 7,59,06,267 during the Assessment Year ("AY") 2016-17 under the provisions of section 43B(f) of the Income Tax Act, 1961 ("the Act"), after having denied the Appellant's claim of provision for leave encashment on accrual basis for AY 2007-08 and AY 2013-14. 3.2. The Learned AO have erred in law and on facts, in not appreciating the fact that the Appellant was eligible for the deduction towards leave encashment although the same was not claimed in the return of income filed by the Company for the AY 2016-17, owing to its claim of deduction of provision for leave encashment made in AY 2007-08 and AY 2013-14 (based on the decision of Hon'ble Calcutta High Court in the case of Exide Industries Limited v. Union of India [20....
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....he learned Departmental Representative supported the orders of the TPO/DRP. 7. We have heard rival submissions and perused the material on record. The profile of the assessee as described by the TPO is that of providing IT enabled services (refer para 2.1 to 2.4 of the TPO's order) The final set of comparable as per the TPO's order and their percentile median are as follows:- Sl.No. Company name Financial Year wise (OP/OC (%) 2014.15 2013-14 2012-13 Average 1 BhilawaraInfotechnology Limited(Seg) 12.32% 7.95% 20.57% 13.39% 2. One Teoch Solutions(India) Private Limited 12.23% 14.87% 18.29% 15.33% 3. Tech MahindraBusiness ServicesLimited 19.71% 29.53% 13.33% 20.44% 4. Infosys BPM Ltd 25.34% 26.80% 27.43% 26.44% 5. SPI Technologies IndiaPvt.Ltd. 40.70% 32.18% 42.48% 37.77% 6. Eclerx Services Ltd. 57.75% 44.39% 70.72% 56.44% 35th Percentile 20.44% Median 23.44% 65th Percentile  ....
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....hnologies India Private Limited, and (iii) Eclerx Services Limited. We find in the case of assessee's group company namely EIT Services India Pvt. Ltd. v. DCIT (supra), the above three companies were excluded from the list of comparables on account of functional dissimilarities. We find that profile of the assessee in the instant case and that of the assessee in case of EIT services India Pvt. Ltd. are identical. Moreover, the assessment year is the same. The relevant finding of the Tribunal in the case of EIT Services India Pvt. Ltd. v. DCIT (supra) reads as follows (For exclusion of (i) Infosys BPO Limited, (ii) SPI Technologies India Pvt. Ltd. and (iii) Eclerx Services Limited):- "13. Further, the assessee wants exclusion of following comparables in IT enabled services. i. Infosys BPO Ltd. ii. SPI Technologies Pvt. Ltd. iii. Eclerx Services Ltd. i. Infosys BPO Ltd. 13.1 The Ld. A.R. submitted that Infosys BPO offers business process outsourcing solutions to its global clients by leveraging process, domain and people management expertise. The nomenclature in the profit and loss account indicates that the income is earned f....
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....hods of billing would affect the Functional comparability or impact the profitability. Unless the same is demonstrated with credible evidence, it remains a theoretical argument without any backing with facts and figures and hence rejected it. 15. The assessee pointed out that this company has reported an amount of Rs. 136 crore as 'cost of Technical sub-contractors' which constitutes about 4.45% of total revenue of the company during the year. The DRP observed that the annual report mentions that these sub-contractors are used for operational activities. This is a common practice in almost all the companies to give a small portion of the work to some other subcontractors for a variety of reasons. This may allow the company to focus on its core activities. Sometimes it may be to meet the mismatch in certain skill-sets that are required in various projects. These expenses are incurred in the routine course of business. This cannot be held to be a criteria to affect the functional comparability of a company and more so in the facts of this case, wherein the sub-contracting expenses are about 4.45% only. This objection was accordingly rejected. 16. Regarding t....
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....lution optimisation. It is noted that this comparable also provides services in financial services and insurance, manufacturing, energy utilities communications and services and retail, consumer packaged foods, logistics and life services. Further in the annual report it has been mentioned that this comparable provides services that are different from routine back-office services. This noting itself makes this comparable not functionally similar with that of assessee. Accordingly we direct this comparable to be excluded from finalist." 21. In view of the above order of the Tribunal, we are inclined to hold that this company should be excluded from the list of comparables. 13.3 The company has also been excluded in the case of ADP (P.) Ltd: [2022] 135 taxmann.com 44 (Hyderabad - Trib.) AY 2016-2017 by the Hyderabad Tribunal. 13.4 In view of the above-mentioned reasons, Ld. A.R. requested to direct the TPO to exclude this comparable from the final list of ITeS Segment. 13.5 Ld. D.R. relied on the order of Ld. DRP. 13.6 We have heard the rival submissions and perused the materials available on record. This company has been consider....
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....to TCS E-serve Ltd., there was exceptional event as the company was taken over by Tata Consultancy Services in the year 2008-09 and heavy turnover is due to its takeover. Further, it was submitted that the company was functionally different as it has three different services and segmental information was not arrived. As far as E-clerx Services Ltd., it was submitted that this company caters to high end KPO services and cannot be compared to routine BPO services provided by assessee. The DRP vide para 3.10 has accepted the assessee's objections and accordingly, directed the TPO to exclude the above three companies. There are other directions of the DRP on TP adjustments on which neither party has raised grounds, except the Revenue on the above exclusion of three companies. 7. Referring to the order of the TPO, it was the contention of Ld. DR that DRP was not correct in excluding them on the basis of the turnover, whereas Ld. Counsel submitted that DRP has followed the decisions of the Co-ordinate Benches in excluding the above three comparables. 8. We have considered the rival submissions and perused the order of the DRP and Co-ordinate Benches. As far as M/s. ....
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....26 (Del.), held that huge turnover companies like Infosys and Wipro cannot be considered as comparable to smaller companies like assessee therein. In the case before the Hon'ble High Court (supra), the turnover of the assessee was about Rs. 15.79 crores as against the turnover of Rs. 1016 crores of the Infosys. Considering these facts, the Hon'ble High Court had directed for exclusion of Infosys BPO because of its brand value and also on the grounds of functional dissimilarity and huge turnover. Though, the company before us is TCS e-Service Ltd., and not Infosys BPO, we find that the turnover of the assessee company for this assessment year is around Rs. 50 crores as against the turnover of TCS EServe Limited of Rs. 1405.10 crores. Therefore, following the turnover filter as well as taking note of the fact that it owns and possesses brand value and intangibles as compared to the assessee which does not own such assets, we direct that this company be excluded from the list of final comparables. Accordingly, assessee's grounds of appeal No. 6 is partly allowed. 8.1 Respectfully following the above decision of the Coordinate Bench, we confirm the order of DRP exc....
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....: (2019) 101 taxmann.com 117 (Bombay) has held that in case the assessee rendering ITES services to AE, a company in whose case extraordinary event of amalgamation took place during relevant year, could not be accepted as comparable and was decided in favour of the assessee. Similarly in the case of Pr. Commissioner of Income Tax Vs. J.P Morgan India (P) Ltd: (2019) 102 taxmann.com 335 (Bombay), the Hon'ble Jurisdictional High Court on the same issue has held as follows: "(iv) Mr. Percy Pardiwalla, learned senior counsel appearing on behalf of the respondent invited our attention to the final decision of this Court in Pr. CIT v. Aptara Technology (P.) Ltd. : [2018] 92 taxmann.com 240 and Pr. CIT v. PTC Software (I) (P.) Ltd: [2019] 101 taxmann.com 117 (Bom.). In both the above decisions this Court has taken a view that merger/amalgamation is an extra ordinary event and would have an impact/effect on the financial results of the company. Thus, in both the aforesaid decisions, this Court upheld the view of the Tribunal that where merger/amalgamation have taken place and it is not a normal event then such a company would cease to be comparable. This of course is subject t....
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....onal Operations (India) (P.) Ltd. (supra) have noted the extraordinary event of acquisition and also amalgamation of another concern and held that the said concern could not be selected as comparable. The relevant findings of Tribunal are in paras 12 and 13, which read as under:- '12. The next concern against which the assessee has raised objections is Accentia Technologies Ltd. on the ground of extraordinary events during the year under consideration. The said concern had acquired IQ group of companies in the United Kingdom and there was amalgamation of Asscent Infoserve Pvt. Ltd. with the said concern and because of these extraordinary events, the margins of said companies should not be included in the final set of comparables. The Pune Bench of Tribunal in Aptara Technologies Pvt. Ltd. v. ACIT: (2016) 72 taxmann.com 352 (Pune -Trib) and Cummins Turbo Technologies Ltd. v. DCIT (2017) 79 taxmann.com 260 (Pune - Trib) has held that the said concern cannot be accepted as comparable. The Tribunal in Aptara Technologies Pvt. Ltd. v. ACIT (supra) held as under:- "14. We find that the Tribunal in assessee's own case in assessment year 2008-09 in ITA No. 2235/PN....
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....e submissions of the Ld. Representative for the assessee and also the stand of the Revenue as emerging from the order of the TPO. In our view, the ratio laid down by the Hyderabad Bench of the Tribunal in the case of Capital IQ Information Systems (India) Private Limited (supra) and by the Bangalore Bench of the Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) is squarely applicable to the present case also. The aforesaid Benches of the Tribunal found that during the year under consideration there were extraordinary events that took place in the said concern which warranted exclusion of this company as a comparable. We therefore hold that the said concern cannot be considered as a comparable." 15. Further, similar proposition has been laid down by different Benches of Tribunal while deciding the appeals relating to assessment year 2010-11 and it has been held that because of extraordinary events during the year, the concern Accentia Technologies Ltd. was not comparable to the entities engaged in ITES. Following the same parity of reasoning, we hold that Accentia Technologies Ltd. is to be excluded from the final set of comparables." 13.....
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....ose of comparability analysis. Under the TNMM, functional similarity is more relevant than product similarity. The DRP noted that the functional profile of this company was similar to the assessee. 23. Regarding the amalgamation of 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 22nd April 2015 and this acquisition was made by the company's overseas subsidiary e-Clerx 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 com....
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....Court had held that once a company falls into the category of high-end KPO, it cannot be functionally comparable with a BPO service provider like that of assessee. Applying this reissue in the present case, we direct Ld. AO to eliminate this comparable from final list." 30. 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. 15.2 The company has also been excluded in the case of ADP (P.) Ltd.: [2022] 135 taxmann.com 44 (Hyderabad - Trib.) AY 2016-2017 by the Hyderabad Tribunal. 15.3 In view of the above-mentioned reasons, the Ld. A.R. requested to direct the TPO to exclude this comparable from the final list of ITeS Segment. 15.4. Ld. D.R. relied on the order of Ld. DRP 15.5 We have heard the rival submissions and perused the materials available on record. This company is not considered as comparable in the case of ADP Pvt. Ltd. cited (supra) in assessment year 2016-17, wherein they excluded the comparable ground No. 7 of that order vide para 17 to 17.4 wherein held as under:- "17. Eclerx Services Ltd.: The ld. AR of the assessee submi....
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....nover and functionally different. With reference to Infosys BPO, the objection was that the said company renders vide array of services and has high brand value and turnover is also very high. With reference to TCS E-serve Ltd., there was exceptional event as the company was taken over by Tata Consultancy Services in the year 2008-09 and heavy turnover is due to its takeover. Further, it was submitted that the company was functionally different as it has three different services and segmental information was not arrived. As far as E-clerx Services Ltd., it was submitted that this company caters to high end KPO services and cannot be compared to routine BPO services provided by assessee. The DRP vide para 3.10 has accepted the assessee's objections and accordingly, directed the TPO to exclude the above three companies. There are other directions of the DRP on TP adjustments on which neither party has raised grounds, except the Revenue on the above exclusion of three companies. 7. Referring to the order of the TPO, it was the contention of Ld. DR that DRP was not correct in excluding them on the basis of the turnover, whereas Ld. Counsel submitted that DRP has followed t....
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....the possession of the brand value and intangibles which influenced the financial results of this company. The Hon'ble Delhi High Court in the case of CIT vs. Agnity India Technologies P. Ltd.,: (2013) 219 Taxman 26 (Del.), held that huge turnover companies like Infosys and Wipro cannot be considered as comparable to smaller companies like assessee therein. In the case before the Hon'ble High Court (supra), the turnover of the assessee was about Rs. 15.79 crores as against the turnover of Rs. 1016 crores of the Infosys. Considering these facts, the Hon'ble High Court had directed for exclusion of Infosys BPO because of its brand value and also on the grounds of functional dissimilarity and huge turnover. Though, the company before us is TCS E-Service Ltd., and not Infosys BPO, we find that the turnover of the assessee company for this assessment year is around Rs. 50 crores as against the turnover of TCS e-Serve Limited of Rs. 1405.10 crores. Therefore, following the turnover filter as well as taking note of the fact that it owns and possesses brand value and intangibles as compared to the assessee which does not own such assets, we direct that this company be excluded f....
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....ce and that the company is engaged in the diversified business (page 16 of TP order). However, upon perusal of the Annual report of Informed, it is seen that the Company is into business process outsourcing services, content development and data management techniques and caters to the securities and financial research industry. These services would classify under the nature of ITeS and therefore it is submitted that Informed is engaged in providing ITeS and is comparable to the Assessee. (He referred page 2062 of the paper book). Also, the comparable qualifies all the quantitative filters applied by the learned TPO. 16.1 Further, Informed Technology has been included in the case of Ocwen Financial Solutions (P.) Ltd. [2019] 108 taxmann.com 306 (Bangalore - Trib.) AY 2014-2015 (He referred Page 178-179 of the Case Law Compilation, Para 10). The company has the same functional profile in AY 2014-15 and AY 2016-17. The Ld. A.R. therefore requested to include this company. 16.2 The relevant extract from the Tribunal's order is reproduced below for ready reference: "10. Informed Technologies Ltd., ('Informed') 10.1 This company 'Inform....
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....38,665/- and 'other income' of Rs. 1,22,85,303/-. As can be seen from Schedule 19 on page 40 of the Annual Report, the 'other income' comprises of non-operating income, interest, dividend, sale of current investments and miscellaneous income and evidently these incomes cannot be considered as operating income. The percentage of 67.7% worked out by the TPO is after considering these "other income" as service income; which is factually incorrect. It is evident from a perusal of the profit and loss account of 'Informed' that the service income is Rs. 2,58,53,362/- which is entirely the revenue from operations and therefore in our considered view, the service income filter of 75% of service income to be from ITES as applied by the TPO, is satisfied in this case. In view of this factual finding rendered in the matter, we hold that this company 'Informed Technologies Ltd.,' satisfies the service income filter and is therefore to be included in the final set of comparables. We hold and direct the AO/TPO accordingly. 16.3 In view of the above-mentioned reasons, Ld. A.R. requested to direct the TPO to include this comparable to the final list of ITeS....
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....t is seen that at page 12 thereof it is stated that this company is engaged in and operating as an ITES provider. A perusal of the TPO's order also indicates that the TPO has not disputed that this company is functionally comparable to the assessee in the case on hand; which is rendering back office ITES. From a perusal of the profit and loss account at page 30 of the Annual Report of 'Informed' it is seen that the total revenue is shown as Rs. 3,81,38,665/- and 'other income' of Rs. 1,22,85,303/-. As can be seen from Schedule 19 on page 40 of the Annual Report, the 'other income' comprises of non-operating income, interest, dividend, sale of current investments and miscellaneous income and evidently these incomes cannot be considered as operating income. The percentage of 67.7% worked out by the TPO is after considering these "other income" as service income; which is factually incorrect. It is evident from a perusal of the profit and loss account of 'Informed' that the service income is Rs. 2,58,53,362/- which is entirely the revenue from operations and therefore in our considered view, the service income filter of 75% of service income to be f....
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....ing of the TPO; observing that while it is stated that "income from foreign currency" is Rs. 3,23,08,386/-, it is not clear whether this relates to export of services as this information is not available and therefore this company 'Crystal' is rejected. 11.2 Before us, it was contended that this company 'Crystal' is functionally comparable to the assessee in the case on hand as it is operating as a BPO Company which is a ITES provider. According to the learned AR, it is very evident from a perusal of the Annual Report of this company 'Crystal' that the income in foreign currency amounting to Rs. 3,23,08,386/- is out of export of services. In support of this contention, the learned AR took us through the relevant pages of the Annual Report of this company, 'Crystal', which is placed at pages 474 to 497 of the paper book. 11.3 Per contra, the learned DR for Revenue supported the orders of the authorities below in not including this company, Crystal Voxx Ltd., in the final set of comparables. 11.4 We have considered the rival contentions/submissions and perused the material on record. We have carefully perused the Annual Repor....
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....and as it is operating as a BPO Company which is a ITES provider. According to the learned AR, it is very evident from a perusal of the Annual Report of this company 'Crystal' that the income in foreign currency amounting to Rs. 3,23,08,386/- is out of export of services. In support of this contention, the learned AR took us through the relevant pages of the Annual Report of this company, 'Crystal', which is placed at pages 474 to 497 of the paper book. 11.3 Per contra, the learned DR for Revenue supported the orders of the authorities below in not including this company, Crystal Voxx Ltd., in the final set of comparables. 11.4 We have considered the rival contentions/submissions and perused the material on record. We have carefully perused the Annual Report of this company, 'Crystal'. At Note 3 of the Notes forming part of the accounts, at page 491 of the paper book, it is stated that the operations of the company predominantly relate to a single segment, namely "BPO Activity". At note 6, the income in foreign currency is shown as Rs. 3,23,08,386/-. In the Director's Report, at page 480 of the paper book, the foreign exchange earnings ....
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....cheme). It was stated that the shares were issued below market price and the discounted value was treated as perquisite u/s. 17(2) of the I.T. Act in the hands of the employees and assessee had deducted appropriate TDS u/s. 192 of the I.T. Act. It was stated that to the extent of discount, the holding company had cross charged the assessee. It was stated that it is in respect of cross charges incurred towards options exercised and shares purchased by employees of the assessee, the same was claimed as deduction u/s. 37 of the I.T. Act. The A.O., however, held that ESOP expenditure booked by the assessee and reimbursed to the holding company is a fictitious expenditure and notional in nature. Though the A.O. had mentioned about the violation of the provisions of section 195(1) of the I.T. Act and consequent disallowance u/s. 40(a)(i) of the I.T. Act, the A.O. held that the assessee has not satisfied conditions specified u/s. 37 of the I.T. Act for claiming such expenditure. The objections filed before the DRP was rejected and the DRP agreed by the conclusions drawn by the A.O. 18. Aggrieved, the assessee has raised this issue before the Tribunal. The learned AR submitted that the ....
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....ure date at a price lower than the current market price. The employees are given stock options at a discount and the same amount of discount represents the difference between market price of shares at the time of grant of option and the offer price. In order to be eligible for acquiring shares under the scheme, the employees are under an obligation to render their services to the company during the vesting period as provided in the scheme. On completion of the vesting period in the service of the company, the option vests with the employees. The expression "expenditure" also includes a loss and therefore, issuance of shares at a discount where the assessee absorbs the difference between the price at which they are issued and the market value of the shares would be expenditure incurred for the purposes of section 37(1). The primary object of the exercise is not to waste capital but to earn profits by securing consistent services of the employees and therefore, it cannot be construed as short receipt of capital. Held, dismissing the appeal, that the deduction of the discount on the employees stock option plan over the vesting period was in accordance with the accoun....
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....ection 43B(f) of the Act which provides for deduction only on the basis of actual payment. Accordingly, the payments made in subsequent years were not claimed since the claim of accrual was already made and the litigations were pending, as detailed below. 23. The A.O. during the assessment proceedings did not accept the claim in FY 2006-07 and FY 2012-13 relevant to the assessment years 2007-08 and 2013-14. Accordingly, the AO made an adjustment of INR 6,83,81,220 and INR 11,66,67,733 -respectively, to the total income in the assessment order under section 143(3) of the Act, for the said AY's. The ITAT in case of assessee for AY 2007-08 and AY 2013-14, has remitted the issue back to the file of the AO through order dated 16 January 2017 in I.T(TP).A No. 1092/Bang/2011 and order dated 25 October 2019 in ITA No. 368(Bang)/2018 respectively to decide the issue based on the outcome of the Hon'ble Supreme Court's decision in the case of Exide Industries. 24. Subsequently on 24.04.2020, the Hon'ble Supreme Court vide Civil Appeal 3545/2009 overruled the judgment of the Hon'ble Calcutta High Court in the case of Exide Industries and upheld the constitutional vali....