AI Drafter 
TaxTMI 
TaxTMI 
2022 (11) TMI 1338
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....with respect to the international transactions undertaken by the Appellant, under section 92CA of the Income Tax Act, 1961 ("the Act"). 1.2. The learned AO/ learned TPO/ Hon'ble DRP erred in rejecting the TP documentation maintained by the Appellant by invoking provisions of subsection (3) of section 92C of the Act. 1.3. The learned AO/ learned TPO/ Hon'ble DRP erred in rejecting the economic and comparability analysis undertaken in the TP documentation and in conducting a fresh comparability analysis by introducing various filters for the purpose of determining the Arm's Length Price ('ALP') of the international transaction thereby following a non-transparent approach. 1.4. The learned AO/ learned TPO/ Hon'ble DRP erred in selecting the companies only if the data pertaining to FY 2016-17 is available in the public databases. 1.5. The learned AO/ learned TPO/ Hon'ble DRP erred in applying different financial year ending filter while selecting the comparable companies thereby not considering the fact that the relevant data for the concerned financial year could be deduced from the corresponding financials. 1.6.....
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....to be disallowed under section 37 of the Act, the Honorable DRP having upheld the said disallowance, have erred in not providing corresponding adjustment of such disallowed expenditure from the operating expenses of the Appellant for the purpose of computing its revised mark-up. 1.12. The learned AO/ learned TPO/ Hon'ble DRP erred in considering bad and doubtful debts as non-operating in nature. 1.13. The learned AO/ learned TPO/ Hon'ble DRP erred in not allowing appropriate adjustments towards working capital differential existing between the Appellant vis-a-vis independent comparable companies. 1.14. The learned AO/ learned TPO/ Hon'ble DRP erred in not allowing appropriate adjustment towards the risk difference between the Appellant vis-à-vis the comparable companies. Comparable companies - Information Technology Enabled Services ("ITES") 1.15 The learned AO/learned TPO/Hon'ble DRP have grossly erred in not rejecting the following companies: - Microland Limited; - Datamatics Business Solutions Limited; − Vitae International Accounting Services Private Limited; − Manipa....
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....Honorable DRP have erred in law, in disregarding the decision of the jurisdictional Karnataka High Court in the case of Biocon Limited, [2020] 121 taxmann.com 351 (Kar.) and Bangalore Tribunal in the case of Northern Operating Services Private Limited [IT(TP)A No.759/Bang/2017] and Novo Nordisk, [2014] 42 taxmann.com 168 wherein it was held that discount on issuance of ESOP is an allowable business expenditure under section 37 of the Act. 2.3. The learned AO and Honorable DRP have erred in law and on facts by stating that there is no outflow of money resulting in an expense whereas the fact is that there is a clear outflow of economic resources/cash in the hands of the appellant, which is wholly and exclusively used for the purpose of business in India. 2.4. The learned AO and Honorable DRP have 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 have erred in law and on facts, in disregarding the employee listing, sample debit notes/invoices and sample Form 16 copies submitted during the....
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....on facts, in disregarding that the remittance towards recovery of ESOP charges is not taxable under the provisions of India-USA Double Taxation Avoidance Agreement. 2.14. The learned AO has erred in law and on facts by contending that the said ESOP cross charge is liable to TDS under section 192 of the Act as "perquisite" in the hands of the employees and also liable to TDS under section 195 of the Act on the reimbursement to the Ultimate Holding Company, thereby resulting in double taxation of same amount. 2.15. The learned AO has erred in law and on facts by contradicting his own statement by stating that on 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. Disallowance of depreciation on slump sale as per intimation under section 143(1) of the Act - INR 22,08,81,498 3.1. The Appellant had entered into a slump sale during the year under consideration and in accordance with the sixth proviso to Section 32 of the Act, the Appellant has claimed deprec....
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.... section 234B of the Act. 2. Ground Nos.1 to 1.9 are general in nature, which do not require adjudication. 2.1 Ground Nos.2 to 2.8, ground Nos.3 to 3.5 and ground Nos.4 to 4.4 are not pressed before us. Accordingly, these grounds of appeal are dismissed as not pressed. 2.2 Ground No.5.1 is preposterous and hence, dismissed. 2.3 Ground No.5.2 is consequential and mandatory in nature, which do not require any adjudication. 3. Now coming to ground No.1.10 we once again reproduce the ground as follows: 1.10 The learned AO/learned TPO/Hon'ble DRP erred in computing the operating profit to operating cost of the Appellant at 6.97% by not considering 'service tax refund' as part of "Operating Revenue". In doing so, the learned TPO and Hon'ble DRP have erred in not appreciating the fact that service tax arises in the normal course of business operations. Further the Hon'ble DRP have erred in rejecting the Appellant's submission that, in the previous FYs, service tax expense was treated as operating in nature (i.e., as part of operating cost base of the Appellant) while calculating the operating profit mark-up earned in relation to the provisio....
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....ier periods totalling to INR 201,899,422. Further, some more Service Tax refund amounting to INR 276,491,677 (Refund application amount INR 282,417,014) for earlier periods were received beyond March 2017 but before finalising the statutory financials of FY 2016-17. 3.5 The above amounts of Service Tax Refunds received were accounted in the Financial Statements (FS) of year ended March 2017 as below: 3.6 Service tax Refund Amount Received during FY 2016-17 (upto March 2017) Debit GL 10710160 - Bank Account (BS) - INR 201,899,422 Credit GL 37090000 - Other Income (P&L)- INR 201,899,422 Service tax Refund Amount Received in June 2017 (before signing of audited FS of FY 2016-17) Debit GL 12900000 - Balances with statutory/government authorities - INR 282,417,014 Credit GL 37090000 - Other Income (P&L)-INR 282,417,014 3.7 The ld. A.R. further submitted that the Service Tax refund received during FY 2016-17 was directly credited to the P&L (as there was no receivable against the same). For the Service Tax Refund received post March 2017 but before signing of the audited financials for FY 2016-17 a Journal Entry was posted to record a....
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....lso exporter of services, such companies would also be similarly claiming a refund of the service tax on such input services. 3.12 The ld. A.R. submitted that several judicial precedents have held that any expenses or provision for expenses if those are related to business activity would be considered "Operating Expenses". Further, he submitted that if there is any reversal of any expenses (debit to P&L) which was considered "Operating Expenses" in nature earlier, the reversal thereof has to be considered "Operating Income" in nature. 3.13 In this regard, he placed reliance on the following decisions: (a) IT(TP)A No.113/Bang/2018- AMD India Private Limited Relying on other jurisprudences in the matter the Tribunal held that provision written back should be regarded as part of the operating revenue of the Assessee while determining PLI. (b) ITA No.2016 and 1972/Bang/2018- Toyota Kirloskar Motors Private Limited. Relying on other jurisprudences in the matter the Tribunal held that when in the year of creating the provision the same was treated as operating expense in nature, reversal of the same should also be treated as operating revenue in ....
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.... such the assessee and the comparables are on the same footing. The assessee has itself shown 'service tax refund' as non-operating income in its financials and so the same has been excluded by the TPO. 4.3 The ld DR further submitted that now in this case assessee is arguing that the income, which it shown as non-operating, is actually operating income. Accepting this contention of the assessee would lead to a lopsided result as similar information is not available from the other comparables. The other comparables might also be having similar income which they might have declared as 'other income' or non-operating income. So after excluding the same the TPO has adopted their operating margins at lower level. So allowing this amount to be included in the operating margins of the assessee alone would not give the correct state of affairs as the comparison with the comparables would become lopsided i.e at one end the income is not being considered for computing margins of comparables but it is being considered for computing margins of the assessee. As such the assessee gets double benefit leading to its operating margin being increased and that of comparables remai....
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....aced as the issue of treatment of 'service tax refund' was never under consideration in either of those cases. The issue adjudicated was the treatment of provisions. In AMD India too, the TPO had never commented specifically that the provision was being disallowed the same related to service tax refund. The issue was that of a mere provision as the same cannot be treated as same as the dispute in the appeal under consideration. 4.8 The assessee is claiming that it is accounting service tax refund in the year of actual receipt (para 2.3 of the written submissions). But at the same time, it is accounting for the service tax refund (Rs 2,76,491,677/-) received in the FY 2017-18 also in the year under consideration by relying on the accounting practices. This is self-contradictory as the assessee is just trying various means in order to show higher profit margins. 4.9 The ld DR stated that the assessee is well aware that it is eligible for service tax refund. So, in actual it is not a cost for it and as such it should not have claimed it as expenditure while getting remunerated from AE on cost plus basis. So, by doing so neither it would have had higher profit in one year....
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....in ground Nos.1.15 to 1.16. 8. Ground No.1.13 is reproduced below: "1.13 The learned AO/ learned TPO/ Hon'ble DRP erred in not allowing appropriate adjustments towards working capital differential existing between the Appellant vis-a-vis independent comparable companies." 8.1 Facts of the case are that the assessee claimed working capital adjustment while computing the net profit margin, which constitutes difference if any, between the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in open market as per 10B(3) of the Rules. 9. The ld. DRP observed that Rule 10B provides for making reasonably accurate adjustment to the uncontrolled comparable transaction to eliminate the material effects of differences on the price, cost or profits. The assessee has argued for working capital adjustment contending that there exist differences in the payable and receivable position between the assessee and the comparables. However, it was not demonstrated with any data or information as to the impact of such difference on the price, cost or profits, and as to whether s....
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.... Ltd. v. JCIT [2019] 101 taxmann.com 313 (Bang. Trib.). "10. The next grievance projected by the Assessee in its appeal is with regard to the action of the CIT(A) in not allowing any adjustment towards working capital differences. On this issue we have heard the rival submissions. The relevant provisions of the Act in so far as comparability of international transaction with a transaction of similar nature entered into between unrelated parties, provides as follows: Determination of arm's length price under section 92C . 10B . (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a specified domestic 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 net margin method, by which,- (i)the net profit margin realised by the enterprise from an international transaction [or a specified domestic transaction] entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed....
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....ne of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. 11. A reading of Rule 10B(1)(e)(iii) of the Rules read with Sec.92CA of the Act, would clearly shows that the net profit margin arising in comparable uncontrolled transactions has to be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market. Chapters I and III of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter the "TPG") contain extensive guidance on comparability analyses for transfer pricing purposes. Guidance on comparability adjustments is found in paragraphs 3.473.54 and in the Annex to Chapter III of the TPG. A revised version of this guidance was approved by the Coun....
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....equity) or by the risk associated with holding specific types of inventory) 16. Making a working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparables, with an assumption that the difference should be reflected in profits. The underlying reasoning is that: * A company will need funding to cover the time gap between the time it invests money (i.e. pays money to supplier) and the time it collects the investment (i.e. collects money from customers) * This time gap is calculated as: the period needed to sell inventories to customers + (plus) the period needed to collect money from customers - (less) the period granted to pay debts to suppliers." 14. Examples of how to work out adjustment on account of working capital adjustment is also given in the said guidelines. The guideline also expresses the difficulty in making working capital adjustment by concluding that the following factors have to be kept in mind (i) The point in time at which the Receivables, Inventory and Payables should be compared between the tested party and the comparables, whether it should be the fi....
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....d depending on the facts and circumstances of a case further details can be called for. As far as the Assessee is concerned, the facts and figures with regard to his business has to be furnished. Regarding comparable companies, one has to fall back upon only on the information available in the public domain. If that information is insufficient, it is beyond the power of the Assessee to produce the correct information about the comparable companies. The Revenue has on the other hand powers to compel production of the required details from the comparable companies. If that power is not exercised to find out the truth then it is no defence to say that the Assessee has not furnished the required details and on that score deny adjustment on account of working capital differences. Regarding applying the daily balances of inventory, receivables and payables for computing working capital adjustment, the Delhi Bench of ITAT in the case of ITO Vs. E Value Serve.com (2016) 75 taxmann.com 195(Del-Trib) has held that insisting on daily balances of working capital requirements to compute working capital adjustment is not proper as it will be impossible to carry out such exercise and tha....
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.... adjustment cannot be allowed to the profit margins, then the comparable uncontrolled transactions chosen for the purpose of comparison will have to be treated as not comparable in terms of Rule 10B(3) of the Rules, which provides as follows: "(3) An uncontrolled transaction shall be comparable to an international transaction if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged to paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences." 18. In such a scenario there would remain no comparable uncontrolled transactions for the purpose of comparison. The transfer pricing exercise would therefore fail. Therefore in keeping with the OECD guidelines, endeavor should be made to bring in comparable companies for the purpose of broad comparison. Therefore the working capital adjustment as claimed by the Assessee should be allowed. We hold and direct accordingly." 16. Respectfully....
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.... definition of ITES. As the company's revenue is predominantly from revenue management services (60%) and consultancy (17%), ld. DRP noted that all the activities of this company are in the nature of ITeS services and comparable to the assessee at any entity level. Therefore, ld. D.R. stated that the ld. DRP was of the view that this company is functionally comparable and upheld as comparable. 12.1.2 We have heard the rival submissions and perused the materials available on record. We have carefully gone through the financials of the Microland Limited engaged in provisions of IT Infrastructure Services, providing remote infrastructure management, segmental details of the company does not provide detailed information to check certain filters, such as, export filter at segmental level. Microland Limited has also invested in the development and its own service management platform "Smart Centre" for delivering infrastructure management services. As seen from its annual report total ITES revenue is 60%. The AO/TPO included 17% of selling services revenue as part of the revenue from ITES, which is not correct. In our opinion, it does not satisfy the 75% of sales as filter and the inco....
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....various comparables will be averaged and a variation of 3% is also permitted. These aspects take care of some differences which are bound to be there between various comparables. In view of the above, he argued that ITeS services cannot be further. classified as BPO and KPO services for the purpose of comparability analysis. Under the TNMM, functional similarity is more relevant than product similarity. It is a fact that this company falls in the category of ITeS. Hence, he stated that the objection on the functional dissimilarity of the company is to be rejected. 12.1.6 As regards lack of segmental information, the ld. D.R. stated that the comparable company derives the whole revenue from sale of services and hence, there is no need of segmental reporting as per AS 17. As stated above while discussing the functional profile the company derives its total revenue from the RTES activities only. This is further supported by the clarificatory note No. 27 at page 52 of the annual report that "the company was operating under one reportable geographical segment and one business segment. Therefore, disclosure as prescribed under AS 17- segment reporting is not applicable. Hence, he argu....
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....rovision of ITes services. As per the annual report of the company, the activity undertaken by the company is in the nature of pre-press activities which is not comparable to the assessee. That further in the website of the company, it is engaged in the diversified set of activities which involves graphic solutions, packaging brand management, digital publishing and digital content solutions. Therefore, the assessee submits that this company should be rejected from the final set of comparables companies. 9. The TPO was of the opinion that in this company i.e. Manipal Digital Systems Private Limited, 90% of the revenue is earned from ITes which is similar to that of the assessee company. The TPO further observed that most of the information provided by the assessee was from website and it cannot be said reliable source of information as any company while projecting itself in public domain tries to shows its diverse functioning and range of products so as to create a brand image of itself. With these observations, the contention of the assessee was rejected and the company was taken as comparable company. 10. That before the Ld. DRP, objections have been raised by t....
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....tities with similar uncontrolled transactions/entities. ITes encompasses a wide spectrum of services that use Information Technology based delivery. Such service could include rendering highly technical services by qualified technical personnel involving advanced skills and knowledge, such as engineering, design and support. While, on the other end of the spectrum ITes would also include voice based call centers that render routine customer support for their clients. The relevant portion of the judgment is extracted as follows for the sake of completeness: ".............Clearly, characteristics of the service rendered would be dissimilar. Further, both service providers cannot be considered to be functionally similar. Their business environment would be entirely different, the demand and supply for the services would be different, the assets and capital employed would differ, the competence required to operate the two services would be different. Each of the aforesaid factors would have a material bearing on the profitability of the two entities. Treating the said entities to be comparables only for the reason that they use Information Technology for the delivery of their ....
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....to indicate an ITeS provider providing a completely different nature of service than any other BPO service provider. A KPO service provider would also be functionally different from other BPO service providers, inasmuch as the responsibilities undertaken, the activities performed, the quality of resources employed would be materially different. In the circumstances, we are unable to agree that broadly ITeS sector can be used for selecting comparables without making a conscious selection as to the quality and nature of the content of services. Rule 10B(2)(a) of the Income Tax Rules, 1962 mandates that the comparability of controlled and uncontrolled transactions be judged with reference to service/product characteristics. This factor cannot be undermined by using a broad classification of ITeS which takes within its fold various types of services with completely different content and value. Thus, where the tested party is not a KPO service provider, an entity rendering KPO services cannot be considered as a comparable for the purposes of Transfer Pricing analysis. The perception that a BPO service provider may have the ability to move up the value chain by offering KPO services cann....
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....e TPO should have specifically stated why he has selected this company as comparable with that of the assessee company since the onus is on him to give reason for such inclusion. The logic was shown from the decision of the Pune Bench of the Tribunal in the case of M/s. Tasty Bite Eatables Limited Vs. ACIT, ITA No.1823/PUN/2018 for the assessment year 2014-15 dated 03.06.2021 wherein it was held that since the comparable chosen by the assessee, the onus is upon it to prove the functional comparability of this company. Extending the same logic, the Ld. Counsel submitted that it was also for the TPO to explain the reasons for inclusion of this company i.e. Manipal Digital Systems Private Limited since it was chosen as comparable by him. 14. We are of the considered view on going through the order of the TPO, findings of the Ld. DRP and the various judicial pronouncements placed on record, first of all the Revenue has selected Manipal Digital Systems Private Limited as comparable to that of the assessee company based on the earning of the company from ITes. However, there is no segmental specification provided neither by the TPO nor by the Ld. DRP for the reason of such inclu....
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.... 2016-17, FY 2015-16 & FY 2014-15. This company is functionally dissimilar - BPM services of the company essentially involves high-end KPO services, like business research, analytics, etc., which requires skilled labour. No segmental financials were given and without prejudice to the fact that the above functionality counter, margins for last two years should not be considered as they are failing export revenue filter. Hence, the ld. A.R. requested for exclusion of this company from the list of comparables. 12.1.12 The ld. D.R. submitted that as per the Form No. MGT-9 forming part of the annual report, the principal activity of the company is described as IT enabled Services and BPM Service providers deriving income around 87.29%. In this case the difference in various segments i.e. low end to high end in ITES services is mainly on account differences in the skill/qualification and pay structure of employees and, therefore, the main point to be considered is whether such differences between employees is going to materially affect the margin of the comparables. On the basis of billing rates / skills no conclusion could be drawn that margins in different segments of ITES services ....
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....cause a comparable has been included or excluded in some year that action or inaction by itself in transfer pricing issues on comparability cannot constitute a precedent to be blindly followed ad infinitum. Whether a particular company is a comparable or not is an exercise, which has to be carried out every year in the case of an assessee considering the facts of that specific year and not blindly following the precedent, which has been laid down in earlier or subsequent year. A comparable is a comparable on facts and not because a precedent makes it so. Neither can the tax payer insist that a comparable be included nor can it be insisted that it be excluded only on the ground of it having been included or excluded in some other previous assessment year. 12.1.15 The ld. D.R. further submitted that in case of Agnity India Technologies Pvt. Ltd vs Assessee, the Coordinate Bench of New Delhi Tribunal in 1.T.A.No.6485/De1/2012 for assessment year 2008-09 observed that precedents cannot be blindly followed. The relevant observations made are extracted as under: - "Para 7.3,,, ...... .3. Having heard the rival submissions and perused the material available on record we find t....
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....ation of this comparable and include this comparable i.e. Datamatics Business Solutions Limited in the list of comparables if it satisfies the export revenue filter. Infosys BPO Limited: 12.1.18 The ld AR submitted that in assessee's own case in earlier assessment year, it was not considered as comparable and he relied on the order of the Tribunal in the assessee's own case in ITA No.212/Bang/2021 dated 27.9.2022 in the assessment year 2016- 17. 12.1.19 The ld. D.R. submitted that on perusal of the annual report, it was noted that this company offers business process outsourcing solutions to its global clients by leveraging process, domain and people management expertise. Further, at Page 31 and 32 under Note 11 Segment Reporting, it is clearly stated that the company's operations primarily relate to providing business process management services, and accordingly revenues represented along with industry classes comprise the primary basis of segmental information. Thus, primary business activity of this company is business process management services, in various verticals such as FSI, MFG, RCL, ECS. The ld DR further submitted that at page 81 of annual report, Note 2.24....
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....suggests that the company is engaged in consul tancy and management services unl ike the Appel lant which is involved only in providing ITES as a captive service provider ent i ty. 13.2 Further, Infosys BPO Limited has been excluded in the case of Swiss Re Global Business Solutions India (P.) Ltd. [2022] 137 taxmann.com 417 (Bangalore - Trib.) AY 2016-2017 (He referred Page 162-163 of the Case Law Compilation, Para 11 - 21). Below is the relevant extract from the order for ready reference: 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 th....
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.... of the view that when it has been held that all the services being done by this company falls in the category of ITeS, then the absence of segmental information remains a theoretical argument. 17. The assessee has also argued that this company has significant 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....
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....t this company cannot be included by observing as under: - "16.1 Infosys BPO Ltd.: The ld. AR submitted that this company may be excluded from the final set of comparables for the reason that this company has incurred outsourcing costs for FY 2013-14, FY 2014-15 and FY 2015-16 and the outsourcing cost incurred by this company reflects a different operating model and hence cannot be compared with the assessee company. Further, he submitted that while this company operates under various revenue model as per the assignments i.e., proportional completion method on rendering services, whereas the assessee charges a mark-up on the cost incurred to provide the services. Further, he submitted that since the cost structure and revenue model of this company is different with that of the assessee, this company ought to be rejected as a comparable company. He relied on the decision of the co-ordinate bench in assessee's own case ADP (P.) Ltd. (supra) wherein the coordinate bench excluded this company as comparable. 16.2 The ld. DR, on the other hand, submitted that presence of outsourcing cost/subcontracting cost does not affect functional comparability. Further, it reduc....
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....in the case of M/s Hyundai Motors India Engineering P. ltd in ITA Nos. 1743/Hyd/2014 (AY.2010-11) & ITA No. 1917/Hyd/2014 (AY.2010-11) dt. 13-11-2015, has decided the issue as under: ITA No 2233 of 2018 ADP Private Ltd Hyderabad "TCS e-SERVE LIMITED 11.2.1. As regards TCS e-Serve Limited is concerned, we find that it possesses brand value as is evident from the Schedule-N (Operation and Other expenses) to the P & L A/c of the annual report for the financial year 2009-10 of Rs. 46,065 thousands and also that it possesses intangibles in the form of software licenses which have not been taken note of by the authorities below while adopting its margin. It is also the case of the assessee that this company has a turnover of Rs. 1405.10 crores which is 25 times of the turnover of the assessee and hence, is not comparable to the assessee. The Ld. Counsel for the assessee had also placed reliance upon the TPO's order in the case of M/s. IGS Imaging Services India Ltd., to hold that there are exceptional circumstances during the relevant financial year due to which this company is not comparable to the assessee. The Ld. Counsel for the assessee also submitted that the segmental....
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.... We observe from the financial statements of this company, that this company is functionally dissimilar and use robotics automation and diversified activities. Therefore, following the decision of the coordinate bench, we direct the AO/TPO to exclude this company as comparable for determining ALP. 13.7 In view of the above order of the coordinate bench of Hyderabad, we direct the AO/TPO to exclude this company viz. Infosys BPO Ltd. from the list of comparables from the final list of ITeS segment. ii. SPI Technologies Pvt. Ltd. 14. The Ld. A.R. submitted that the company is into diversified business activities. The Company is engaged in data processing and related services, primarily in the typesetting business, including transformation of unedited manuscripts into final print-ready files, supply of structured data for electronic publishing and providing end-to-end project management services. 14.1 SPI Technologies India Private Limited has been excluded in the case of Entercoms Solutions Private Limited [TS-548-ITAT-2021(PUN)-TP] Page 10 of the order - AY 2015-2016. Below is the relevant extract from the order for ready reference: "10....
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....f the profitability of the company. This has not been shown by the Revenue either to the Tribunal or before us. Therefore, this issue stands covered by the decision of this Court in Aptara Technology (P.) Ltd.'s case (supra) and PTC Software (I) (P.) Ltd.'s case (supra) in favour of the respondent. This more particularly in view of the absence of the Revenue even attempting to show that the merger and amalgamation that took place in the case of comparable M/s. Keynote Corporate Securities Limited was such that it would not have any impact on its profitability. It is true that in case of PTC Software (I) (P.) Ltd. case (supra) this question has been admitted, however, the admission was on the facts and circumstances of that case. In any case the issue now stands concluded by final orders of this Court in case of Aptara Technology (P.) Ltd. (supra) and PTC Software (I) (P.) Ltd.'s case (supra) and it is being followed. (v) In view of the above, as the proposed question is covered by the decision of this Court, no substantial question of law arises. Thus, not entertained." 9. That even the Pune Bench of the Tribunal in the case of Brintons Carpets Asia (P....
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....ble because of certain extraordinary events. The said ratio was also applied in assessee's own case while benchmarking the international transaction of assessee with its associate enterprises in assessment year 2009-10 in ITA No.267/PN/2014, order dated 29.04.2015. The Tribunal vide order dated 02.02.2015 had held that the concern Accentia Technologies Ltd. could not be included in the final set of comparables holding as under:- "13. Next, assessee had contended that Accentia Technologies Ltd. has been wrongly included by the TPO as a comparable concern. As per the assessee, the said concern was engaged in functionally different activities. It was pointed out that the said concern is engaged in providing medical transaction, billing and coding services, application development & customization (segmental data not available). Moreover, it was contended that the sales/turnover of the said concern was more than Rs. 50 crores for the year under consideration which did not meet with turnover filter applied by the assessee. On this point, it was pointed out that the assessee had selected sales/turnover filter of 1-50 crores i.e. any concerns having a turnover exceeding Rs. 50....
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....mins Turbo Technologies Ltd. v. DCIT (supra), we hold that Accentia Technologies Ltd. cannot be compared as comparable because of extraordinary events of acquisition and amalgamation during the year. Accordingly, we direct the Assessing Officer/TPO to exclude Accentia Technologies Ltd. from final list of comparables." 10. We, place reliance on the afore-stated judicial precedents where there is an emerging consistent view in this regard that if an extraordinary event has taken place by way of amalgamation that company cannot be considered as a comparable one and following the same parity of reasoning, we direct the Assessing Officer/TPO to exclude SPI Technologies India Pvt. Ltd. from the final set of comparables while computing international transactions in respect of the assessee in ITes segment." 14.5 In view of the above order, we direct the AO/TPO to exclude SPI Technologies Pvt. Ltd. from the list of comparables selected for ITeS segment. iv. Eclerx Services Ltd. 15. Ld. A.R. submitted that the company offers solutions in the nature of Knowledge Process Outsourcing (KPO) Services. The Appellant submits that the nature of the high end KPO se....
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.... last few years. The ALP margin is determined with reference the average profit margin of a comparable for three years and also taking into account the defined median value of the PLIs of the comparable. These will even out such differences. The DRP was of the opinion that it will not be proper to reject a comparable only on account of inorganic growth of top line, which otherwise is functionally comparable. 26. The DRP further observed that it was consistently held that high profit margin as such cannot be reason for exclusion when it is otherwise functionally comparable. Accordingly, there is no need to reject a functionally comparable company on account of having super profits. 27. The Assessee submitted that Eclerx suffers business concentration risk unlike the Assessee, who operates as a risk-free entity. The DRP observed that as far as the limited risk in the case of captive service providers is concerned, if this argument is accepted then it cannot be compared to any company as most of the companies will be independent companies. Rather it should be compared to independent companies only as the price received for the services by them will be determined by m....
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....d in providing KPO services, different to low end BPO services provided by the assessee. He submitted that Safe Harbor Rules recognizes ITeS activities under tow distinct categories i.e., BPO and KPO and activities of this company falls under KPO services. He submitted that the services provided by this company of following: (a) Contract Risk Review, (b) Margin Exposure Management, (c) Online Operations and web analytics, (d) CRM and business intelligence, (e) Content creation, (f) business process consulting. 17.1 He further submitted that as per NIC code provided in the annual report, this company has been classified as KPO and has been awarded as leading KPO's in India, basis award and accolades received. He submitted that this company has undertaken the following extraordinary transactions thereby impacting the operating margins: (a) Acquisition of CLX Europe (b) Amalgamation of Agilest consulting (P.) ltd. 17.2 He relied on the decision of the co-ordinate bench in assessee's own case ADP (P.) Ltd. (supra) wherein the co-ordinate bench excluded this company as comparable. ....
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....he rival submissions and perused the order of the DRP and Co-ordinate Benches. As far as M/s. TCS e-Serve Ltd., is concerned, the Co-ordinate Bench of ITAT in the case of M/s Hyundai Motors India Engineering P. ltd in ITA Nos. 1743/Hyd/2014 (AY.2010-11) & ITA No. 1917/Hyd/2014 (AY.2010-11) dt. 13-11-2015, has decided the issue as under: ITA No 2233 of 2018 ADP Private Ltd Hyderabad "TCS eSERVE LIMITED 11.2.1. As regards TCS e-Serve Limited is concerned, we find that it possesses brand value as is evident from the Schedule-N (Operation and Other expenses) to the P & L A/c of the annual report for the financial year 2009-10 of Rs. 46,065 thousands and also that it possesses intangibles in the form of software licenses which have not been taken note of by the authorities below while adopting its margin. It is also the case of the assessee that this company has a turnover of Rs. 1405.10 crores which is 25 times of the turnover of the assessee and hence, is not comparable to the assessee. The Ld. Counsel for the assessee had also placed reliance upon the TPO's order in the case of M/s. IGS Imaging Services India Ltd., to hold that there are exceptional circumstance....
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....espectfully following the above decision of the Co-ordinate Bench, we confirm the order of DRP excluding the above company from the list of comparables. We observe from the financial statements that this company is functionally dissimilar and engaged in KPO and BPO services and amalgamation of Agilest Consulting Pvt. Ltd., vide page No. 23 of paper book volume -1 para 8 and acquisition of CLX Europe which impacts on the profits of the company. From the financial statements of the Chairman's message placed at page No. 18 of paper book volume - 1, it has been categorically stated that after acquisition of CLX Europe, the revenue has grown by 30%, which clearly shows that it impacts on the profitability of the company. These are extraordinary events. Therefore, If an extraordinary event has taken place by way of amalgamation in a company, that company cannot be considered as a comparable as held by the co-ordinate bench of ITAT, Pune, in the case of Entercoms Solutions (P.) Ltd. (supra). Accordingly, we direct the AO/TPO to exclude this company as comparable from the list of comparables." 15.6 In view of the above order of the Tribunal, we direct the AO/TPO to ex....
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....o comparables i.e. Bhilwara Infotechnology Ltd. and R. Systems International Limited are remitted to the file of AO/TPO for fresh consideration to verify whether they satisfy all the filters adopted by AO/TPO while selecting comparables. Ordered accordingly. ISN Global Limited: 13.5 The ld. DR stated that the Ld. DRP has observed in his order that this comparable do not figure in the search matrix of the TPO. The ld. DR stated that the ld. DRP has already upheld the rejection of TP document of the assessee which in turn means that a fresh search has to be conducted by the TPO. Based on the fresh search, the TPO has identified the comparables. The assessee can only ask those companies out of the TPO's search matrix which have been wrongly rejected by the TPO. As these companies do not figure in the TPO's search matrix, the ld. DRP opined in his observation that the functionality is not required to be seen at all, as it amounts to cherry picking. Against this assessee is in appeal before us and submitted that this company is functionally comparable to assessee and passes through all filters adopted by the AO/TPO. 13.6 We have heard the rival submissions and perused t....
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....ed AO and Honorable DRP have erred in law, in disregarding the decision of the jurisdictional Karnataka High Court in the case of Biocon Limited, [2020] 121 taxmann.com 351 (Kar.) and Bangalore Tribunal in the case of Northern Operating Services Private Limited [IT(TP)A No.759/Bang/2017] and Novo Nordisk, [2014] 42 taxmann.com 168 wherein it was held that discount on issuance of ESOP is an allowable business expenditure under section 37 of the Act. 2.3. The learned AO and Honorable DRP have erred in law and on facts by stating that there is no outflow of money resulting in an expense whereas the fact is that there is a clear outflow of economic resources/cash in the hands of the appellant, which is wholly and exclusively used for the purpose of business in India. 2.4. The learned AO and Honorable DRP have 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 have erred in law and on facts, in disregarding the employee listing, sample debit notes/invoices and sample Form 16 copies submitted ....
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....n law and on facts, in disregarding that the remittance towards recovery of ESOP charges is not taxable under the provisions of India-USA Double Taxation Avoidance Agreement. 2.14. The learned AO has erred in law and on facts by contending that the said ESOP cross charge is liable to TDS under section 192 of the Act as "perquisite" in the hands of the employees and also liable to TDS under section 195 of the Act on the reimbursement to the Ultimate Holding Company, thereby resulting in double taxation of same amount. 2.15. The learned AO has erred in law and on facts by contradicting his own statement by stating that on 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. 14.1 The ld AR relied on the earlier order of the Tribunal in assessee's own case in IT(TP)A No.212/Bang/2021 dated 27.9.2022 in support of the above grounds regarding Corporate Tax. 14.2 The Ld. D.R. stated that the Transfer Pricing study done by the TPO and the assessment framed by the Assessing Of....
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....e of 'service tax refund', in the Transfer Pricing (TP) study done by the Transfer Pricing Officer (TPO), while working out the operating margins the assessee as well as all comparables are on the same footing as their financials alone have been considered. Now in this case assessee is arguing that if ESOP expenses are disallowed then its operating expenses should also be reduced and the profit margins be enhanced. Accepting this contention of the assessee would lead to a lopsided result as similar information is not available from the other comparables. The other comparables might also be having similar or other disallowances. So allowing this amount to be excluded from the operating expenses of the assessee alone would not give the correct state of affairs as the comparison with the comparables would become lopsided i.e at one end such disallowed expenses are not being considered for computing margins of comparables but it is being excluded for computing margins of the assessee. As such the assessee gets double benefit leading to its operating margin getting increased and that of the comparables remaining low as no such exclusion was done in their cases. In view of above ....
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....sessee has raised this issue before the Tribunal. The learned AR submitted that the issue raised is squarely covered by the order of the Tribunal in assessee's group case in EIT Services India Pvt. Ltd. v. DCIT (supra). It was stated that the Tribunal in the above mentioned case, had followed the dictum laid down by the Hon'ble jurisdictional High Court in the case of CIT v. Biocon Limited reported in 121 taxmann.com 351 (Karnataka), wherein it was categorically held that ESOP expenditure is deductible u/s 37 of the I.T.Act. 19. The learned DR was unable to controvert the submissions of the learned AR. 20. We have heard rival submissions and perused the material on record. In assessee's group case, namely, EIT Services India Pvt. Ltd. v. DCIT (supra), had held that the ESOP expenditure is to be allowed as a deduction u/s 37 of the I.T.Act. The Tribunal had followed the judgment of the Hon'ble jurisdictional High Court in the case of CIT v. Biocon Limited (supra). The relevant finding of the Tribunal in assessee's group case, reads as follows:- "20.27 We have heard the rival submissions and perused the materials available on record. This issue came up for ....
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....ption plan over the vesting period was in accordance with the accounting in the books of account, which had been prepared in accordance with Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999. For assessment year 2009-10 onwards the Assessing Officer had permitted the deduction of the employees stock option plan expenses. The Revenue could not be permitted to take a different stand with regard to the assessment year 200405. The expenses were deductible." 21. In view of the above judgement of Hon'ble Karnataka High Court in the case of Biocon Ltd., we are in agreement with the contention of assessee's counsel in principle on this issue. However, we make it clear that the AO has to verify whether the said amount has been subject to TDS in the assessment year under consideration u/s 192/195 of the Act as argued by the Ld. A.R. before us. Accordingly, this issue is remitted to AO for fresh consideration in the l ight of above." 21. The assessee has raised grounds with regard to the issue that the assessee is not liable for TDS u/s 195 of the I.T.Act (refer grounds 2.9 to 2.15). We are of the view t....
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....rued to the assessee during the previous year. The only question to be decided is as to whether it is the expenditure of the assessee or that of the parent company. We are of the view that the observations of the CIT(A) in para 5.6 of his order that these expenses are the expenses of the foreign parent company is without any basis and lie in the realm of surmises. The foreign parent company has a policy of offering ESOP to its employees to attract the best talent as its work force. In pursuance of this policy of the foreign parent company, allowed its subsidiaries/affiliates across the world to issue its shares to the employees. As far as the assessee in the present case which is an affiliate of the foreign parent company is concerned, the shares were in fact acquired by the assessee from the parent company and there was an actual outflow of cash from the assessee to the foreign parent company. The price at which shares were issued to the employees was paid by the employee to the Assessee who in turn paid it to the parent company. The difference between the fair market value of the shares of the price at which shares were issued to the employees was met by the Assessee. This factua....
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.... were that the assessee company incurred certain expenses on account of payments made by it for the shares allotted to its employees in connection with the ESPP. The AO had disallowed Rs. 9,06,788/- incurred by the assessee on the ground that this expenditure is not the expenditure of assessee company but that expenditure is of parent company and the benefit of such expenditure accrues to the parent company and not assessee. The CIT(A) deleted the addition made by the AO. The CIT(A) found that the common shares of Accenture Ltd. the parent company, have been allotted to the employees of ASPL, the Indian affiliate/Assessee and not to the employees of the parent company. The CIT(A) also found that though the shares of the parent company have been allotted, the same have been given to the employees of the Assessee at the behest of the Assessee. The CIT(A) thus held that it was an expense incurred by the assessee to retain, motive and award its employees for their hard work and is akin to the salary costs of the assessee. The same was therefore business expenditure and should be allowable in computing the taxable income of the assessee. The tribunal upheld the view of the CIT(A). It ca....
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....ave heard rival submissions and perused the material on record. In assessee's group case, namely, EIT Services India Pvt. Ltd. v. DCIT (supra), had held that the ESOP expenditure is to be allowed as a deduction u/s 37 of the I.T.Act. The Tribunal had followed the judgment of the Hon'ble jurisdictional High Court in the case of CIT v. Biocon Limited (supra). The relevant finding of the Tribunal in assessee's group case, reads as follows:- "20.27 We have heard the rival submissions and perused the materials available on record. This issue came up for consideration before the Hon'ble Karnataka High Court in the case of CIT Vs. Biocon Ltd. cited (supra) wherein it was held as under:- "From a perusal of section 37(1) of the Income-tax Act, 1961 it is evident that the provision permits deduction of expenditure laid out or expended and does not contain a requirement that there has to be a payout. If an expenditure has been incurred, section 37(1) of the Act would be attracted. Section 37 does not envisage incurrence of expenditure in cash. An assessee is entitled to claim deduction under the provision if the expenditure has been incurred. It is well settled in l....