TaxTMI 
TaxTMI 
TaxTMI 
2022 (11) TMI 1338
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.... 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. The learned AO/learned TPO/Hon'ble DRP erred in applying export earning filter of ....
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....t 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; − Manipal Digital Systems Private Limited; - CES Ltd; - SPI Technologies India Private Limited; - Inteq BPO Services Private Limited; and - Infosys BPO Limited. 1.1....
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.... 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 Assessment/DRP proceedings by the Appellant. 2.6. The Learned AO and Honorable DRP have 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 ....
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.... 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 depreciation amounting to Rs. 22,08,81,498 on assets transferred under slump sale, based on the number of days the assets have been put to use by the Appellant. 3.2. On account of the limitation of disclosure in the ROI, the Appellant claimed the amount of Rs. 22,08,81,498 under SI.No. 12(ii) of Schedule BP of ROI. Further, the Appellant submits that said depreciation also forms a part of disclosure....
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....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 provision of Information Technology Enabled Services ("ITES") to the Associated Enterprises. Hence when the services tax refund is credited in the Profit & Loss statement as 'other income' then for the purposes of TP, the same requires to be considered as part of 'Operating Revenue' as a matter of maintaining parity. 3.1 The ld. A.R. submitted as follows: 3.2 Accounting of Service Tax cost by the Assessee upto 31st March 2016 - The ld. A.R. submitted that the Assessee use....
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.... 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 accrual of Service Tax Refund. This was done in accordance with generally accepted accounting practices wherein significant events occurring after Balance Sheet date are to be reported in the Financial Statement if the same come to notice before signing of the audited FS. This is mandated as per Accounting Standard 10 "Events occurring post Balance Sheet Date". Thus, there was a total credit of INR 484,316,435 in the FY 2016-17 P&L of the assessee towards receipt of Service Tax refund which was disclosed in FS as "Other Income". 3.8 Treatment of Service Tax Refund receipt by the assessee in ....
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....ons: (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 nature. 4. The Ld. D.R. submitted that it is admitted by the assessee that the service tax refund pertains to the service tax amounts of earlier years. The assessee also admitted that these service tax amounts were expensed off along with the operating costs in the respective years. The assessee contended that since such service tax forms part of the operating cost of the previous year's refund has to be considered as part of operating income in the current year. The income received as refund on account of excess taxes paid in previous years cannot be part of operating income of the current year. Such amount paid back can....
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....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 remaining at reduced level due to non-consideration of such income in their cases. In view of above the ld DR stated that the arguments of the assessee need to be rejected. 4.4 The ld DR further stated that alternatively, the TPO should be allowed to collect information regarding breakup of 'other income from the selected comparables and give same treatment of such income for the assessee as well as the comparables. This aspect that the other comparables would also be having similar service tax refund is also admitted by the assessee in para 2.4 of its written submissions filed during hearing on 10.11.2022. 4.5 He stated that the ope....
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....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 nor lower in another year i.e. on receipt of refund. However, it has planned its ways to have the advantage twice i.e. able to show more profits from the AE by charging cost plus on the service tax and then again showing higher profit in the year of tax refund by treating it as operating income. The operating income of the assessee is only that which it receives from its AE on cost plus basis and not anything else. If such income gets enhanced due to service tax payment or gets reduced due to service tax refund (as corresponding expenditure gets increased or reduced), that only is its operating income on cost plus basis. 5. We have heard the ri....
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....d 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 such difference materially affect the price, cost or profits. The 'Accounts payables' and 'Receivables' shown in the balance sheet only reflects the position as at the end of the financial year, and as such it would not enable to measure the impact of working capital on the costs, price or profits. The working capital requirements and impact depends on various factors such as business cycle, the nature of business activity with its correlation on the general economic trends, the fund and capital position of the company, its marketing strategies, its market share etc. all of which cannot be captured in the year end Receivable or Payable position. Besides, the '....
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....ic 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 by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin....
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.... 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 Council of the OECD on 22 July 2010. In paragraph 2 of these guidelines it has been explained as to what is comparability adjustment. The guideline explains that when applying the arm's length principle, the conditions of a controlled transaction (i.e. a transaction between a taxpayer and an associated enterprise) are generally compared to the conditions of comparable uncontrolled transactions. In this context, to be comparable means that: * None of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology (e.g. price or margin), or * Reasonably accurate adjustments can be made to eliminate the effect of any such differences. These are called "comparability adjustments. 13. In Paragraph 13 to 16 of the aforesaid OECD guidelines, need ....
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....nes. 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 figures of receivables, inventory and payable at the year end or beginning of the year or average of these figures. (ii) the selection of the appropriate interest rate (or rates) to use. The rate (or rates) should generally be determined by reference to the rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. The guidelines conclude by observing that the purpose of working capital adjustments is to improve the reliability of the comparables 15. In the present case the TPO allowed working capital adjustment accepting the calculation given by the Assessee. The CIT(A) in exercise of his powers of enhancement held that no adjustment should be made to the profit margins on account of working capital differences between the tested party and the comparable companies for the following reasons: (i) The daily working capital ....
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....h 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 that working capital adjustment has to be based on the opeing and closing working capital deployed. The Bench has also observed that that in Transfer Pricing Analysis there is always an element of estimation because it is not an excact science. One has to see that reasonable adjustment is being made so as to bring both comparable and test party on same footing. Therefore there is little merit in CIT(A)'s objection on working adjustment based on unavailable daily working capital requirements data. There is also no merit in the objection of the CIT(A) regarding absence of segmental details available of working capital requirements of comparable companies chosen and absence of details of trade and non-trade debtors of comparable companies as these details are beyond the power of the Assessee to obtain, unless these details are available in public domain. Regarding absence of cost of working capital funds, the OECD guidel....
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....s, 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 following the aforesaid decision, we hold that the working capital adjustment as claimed by the Assessee should be allowed. We hold and direct accordingly." 10.1 In view of above order of the Tribunal, we direct the AO/TPO to grant working capital adjustment. Ordered accordingly. 11. Next ground No.1.14 is reproduced below: "1.14 The learned AO/ learned TPO/ Hon'ble DRP erred in not allowing appropriate adjustment towards the risk difference between the Appellant visà- vis the comparable companies." 11.1 The ld. A.R. submitted that this ground is only academic and hence it does not require any adjudication. Hence, this ground is dismissed. 12. Next ground No.1.15 is reproduced below: 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; ....
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....venue 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 income from ITES services is only 60%. Hence, it is directed that Microland Limited is to be excluded from the list of comparables. Manipal Digital Systems Private Limited 12.1.3 The contention of the Ld. A.R. is that it is not functionally similar to the assessee's case as no segmental details are available and advertisement & sales promotion expenses works out at 6.5% in assessment year under consideration, 7.19% in assessment year 2016-17 & 8.78% in assessment year 2015-16. Hence, he argued that this company be excluded from the list of comparables. 12.1.4 The ld. D.R. submitted that it is crystal clear from the annual report that the principal business activity of the company is given as IT enabled services which contributes 100% turnover of the company. On perusal of the breakup of the revenue given at page 41 of annual report, the revenue earned from IT enabled services is Rs. 23.63 out of total revenue of Rs.24.34 crores, which comes to around 97.08%. He submitted that the other activities like pre-media work, e-distribution contributes aro....
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....t and one business segment. Therefore, disclosure as prescribed under AS 17- segment reporting is not applicable. Hence, he argued that the objection on lack of segmental information is not valid and not acceptable. 12.1.7 The ld. D.R. further stated that the assessee contended that this comparable has incurred significant selling, marketing expenses. From the perusal of the annual report, ld. DR noted that the expenses on this count is only 5.05% of the total sales and which is not at all significant to affect the profitability of the comparable. Accordingly, ld. D.R. stated that that this plea is rejected by the ld. DRP and selection of this company is upheld by ld DRP. 12.1.8 We have heard the rival submissions and perused the materials available on record. As per the annual report of the company, it is also in end-to-end content services across the value chain. From the website and annual report, it is clearly evident that the company is also engaged in web development, mobile application development. The company also provides publishing editorial & composition services, which includes creating layout & artwork for advertisements and brochures, typesetting services and proof ....
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....was taken as comparable company. 10. That before the Ld. DRP, objections have been raised by the assessee which are at running Page No.34 of the appeal memo and therein, apart from reiterating the submissions made before the TPO, the assessee has stated that as per the online advertising laws and guidelines provided by the Advertising Standard Council of India, advertisements are based on principle of truthfulness and honesty of representation and there cannot be any misleading advertisement. That further, since the audited financial statements do not provide detailed description of operations/products in which the company deals, the website can be referred to for the analysis of functions performed by the company. The Ld. DRP vide Para (c) of Page No.67 to 70 of its order and as per reasoning therein, had upheld the findings of the TPO and included Manipal Digital Systems Private Limited in the final set of comparables companies. That again the prime observation of the Ld. DRP in this regard was that more than 90% of the total revenue of the operation of the company comes from ITes. 11. At the time of hearing, the Ld. Counsel for the assessee took us through the annual repor....
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.... for the reason that they use Information Technology for the delivery of their services, would, in our opinion, be erroneous. 32. It has been pointed out that whilst the Tribunal in Willis Processing Services (India) Pvt. Ltd. v. DCIT (supra) held that no distinction could be made between KPO and BPO service providers, however, a contrary view had been taken by several benches of the Tribunal in other cases. In Capital IQ Information System India (P.) Ltd. v. Dy. CIT, (IT) [2013] 32 taxmann.com 21 and Lloyds TSB Global Services Pvt. Ltd. v. DCIT, (ITA No. 5928/Mum/2012 dated 21th November 2012), the Hyderabad and Mumbai Bench of the Tribunal respectively accepted the view that a BPO service provider could not be compared with a KPO service provider. 33. The Special Bench of the Tribunal in Maersk Global Centers (India) Pvt. Ltd. (supra) struck a different cord. The Special Bench of the Tribunal held that even though there appears to be a difference between BPO and KPO Services, the line of difference is very thin. The Tribunal was of the view that there could be a significant overlap in their activities and it may be difficult to classify services strictly as falling under the....
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....ty to move up the value chain by offering KPO services cannot be a ground for assessing the transactions relating to services rendered by the BPO service provider by benchmarking it with the transactions of KPO services providers. The object is to ascertain the ALP of the service rendered and not of a service (higher in value chain) that may possibly be rendered subsequently. 35. As pointed out by the Special Bench of the Tribunal in Maersk Global Centers (India) Pvt. Ltd. (supra), there may be cases where an entity may be rendering a mix of services some of which may be functionally comparable to a KPO while other services may not. In such cases a classification of BPO and KPO may not be feasible. Clearly, no straitjacket formula can be applied. In cases where the categorization of services rendered cannot be defined with certainty, it would be apposite to employ the broad functionality test and then exclude uncontrolled entities, which are found to be materially dissimilar in aspects and features that have a bearing on the profitability of those entities. However, where the controlled transactions are clearly in the nature of lower-end ITeS such as Call Centers etc. for renderi....
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....DRP for the reason of such inclusion of this company in the final set of comparable companies with that of the assessee company. In the decision of the Hon'ble Delhi High Court (supra.), it is very much clear in the wide spectrum of ITes if two companies are to be comparable one has to look into the characteristic of service or business provided under ITes by them. This exercise was not done by the Department in this case. We also opine that as per Indian Council for Advertising, the online advertising has to be published on true and honest disclosure basis and therefore, when proper documentation of activities are not physically available, in such scenario, referring the website for information is correct option and the information therein cannot be doubted. These are all multinational companies and certain amount of honesty has to be attributed to them since all are functioning as per relevant rules and laws. With these observations and respectfully, following the judgment of the Hon'ble Delhi High Court (supra.) we direct the AO/TPO to exclude this company i.e. Manipal Digital Systems Private Limited from the final set of comparables with that of the assessee company." 17. Le....
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....TES services is also different. This is because if the billing rate is high in the high-end services, the cost of the employees who are highly qualified/skilled also goes up steeply and, therefore, the margins are not much affected. In fact, no evidence has been produced before us to show that margins in the high end segments of ITES services is high compared to low end services. Therefore, ld. DRP did not accept the argument advanced by learned AR that the comparables belonging to high end segments such as KPO etc. should be excluded from the comparability list on this ground alone. He stated that in fact, KPO is a term given to a branch of BPO in which apart from processing data, knowledge is also applied. In view of the above, 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. Accordingly, ld. DR objected the plea of the assessee. Therefore, he stated that the company is functionally similar to the assessee as it is being predominantly into ITES company. 12.1.13 The ld. DR further stated that as regards lack of segmental information, the com....
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....hat in the peculiar facts and circumstances of the case where the Hon'ble High Court has not approved of the approach of the ITAT in relying upon the precedent available in assessee's own case for the immediately preceding assessment year which precedent stood approved by the Hon'ble High Court itself we find that the prayer of the Ld. DR that decision be made first on facts on record and thereafter precedence be considered is not only a settled legal position but in the facts of the present case following this settled position the issue has been remanded despite the fact that the Co- ordinate Bench had followed the precedence in assessee's own case. Para 13 ............ We find on facts that the prayer of the tax payer for exclusion of the said comparable cannot be ousted on the ground that it was not objected to in the previous assessment year. Whether 5 particular comparable is accepted or rejected in a previous assessment year consciously or inadvertently by the assessee or the authorities is not the basis on which the issues can be decided. As and when challenge is posed of the inclusion or exclusion of a comparable the challenge has to be considered on the ....
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....learly states that as per function wise classification it has income from business process management services. 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. In view of the above information in the annual report, ld. D.R. stated that there is no merit in the plea that this company is functionally different, and that it has diversified activities, and hence stated that this plea be rejected. 12.1.20 We have heard the rival submissions and perused the materials available on record. We have considered the arguments of both parties. In the assessment year 2016-17, in the assessee's own case in IT(TP)A No.212/Bang/2021 dated 27.9.2022, the Tribunal has considered this company as not comparable wherein held as under: "10. As mentioned earlier, the limited submission of the assessee before the Tribunal as per ground 1.12 is seeking exclusion of three companies from the list of comparable companies, namely, (i) Infosys BPO Limited, (ii) SPI Technologies India Private Limited, and (iii) Eclerx Services Limited. We find in the case o....
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.... 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 is into high end ITES service provider, and hence not comparable, the DRP held that under TNMM, there is no requirement that the comparables should render the same or identical services. It would be sufficient, if the services fall under the broad industry segment ITES. In this regard the DRP relied on the Bangalore Tribunal decision in the case of GE India Technology Centre (P.) Ltd. v. Dy. DIT [2013] 30 taxmann.com 249/141 ITD 245 and other decisions wherein it was observed that TNMM requires only broad comparability. 14. The contention of the assessee that Infosys BPO has various Revenue Models and its revenues are generated principally on time and material basis, transaction basis and fixed price contracts and therefore, it should not be compared with the assessee, the DRP observed that as the assessed failed to demonstrate as to how the different methods of billing would affect the Functional comparability or impact the profitability. Unless the same is demonstrated with credible evidence, it remains ....
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....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 profitability of the comparable. 19. Thus, in view of the discussions held above, all the grounds raised by the assessee were rejected and the action of the AO/TPO was upheld by the DRP. 20. We have heard both the parties and perused the material on record. This comparable has been considered as not comparable in SwissRe Global Business Solutions India (P.) Ltd. v. Dy. CIT [2020] 116 taxmann.com 716 (Bang. - Trib.) wherein it was observed as under :- "We have perused submissions advanced by both sides in light of records placed before us. We note that this company is providing services in various areas of sourcing and procurement, customer services, finance and accounting legal process outsourcing, sales and fulfilment, analytics, business platforms, business transformation services, human resource outsourcing and technology solution optimisation. It is noted that this comparable also provides services in financial services and insurance, manufacturing, energy utilities communications and services and retail, consumer ....
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....have considered the rival submissions and perused the material on record as well as the orders of TPO/DRP. We find that the co-ordinate bench in assessee's own case ADP (P.) Ltd. (supra) has excluded this company as comparable by observing as under: '38. Having regard to the rival contentions and the material on record, we find we find that the Co-ordinate Bench of this Tribunal in the assessee's own case not only for the A.Ys 2009-10 for the A.Y 201011 has also considered this issue at Paras 6 to 9 in ITA No. 221/Hyd/2015 which reads as under: "6. The TPO has selected many comparables and among them M/s. Infosys BPO Ltd., TCS E-serve Ltd., and Eclerx Services Ltd., were objected to on the reason of high turnover 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 ....
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....les' is supported by the evidence on record. However, as regards the extraordinary event or exceptional circumstance there is no material placed before us by the Ld. Counsel for the assessee. Therefore, merely because the TPO in another case has held that there is an extraordinary event for which this company has to be excluded from the list of comparables, it cannot be excluded. Such claim has to be supported by evidence on record. As regards the functional dissimilarity and huge turnover and brand value is concerned, we find that this Tribunal in assessee's own case for A.Y.2009-10 while considering the comparability of the assessee with Infosys BPO Ltd., has taken note of 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 v. 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. 101....
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....arity 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." 14.2 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. 14.3 Ld. D.R. relied on the order of Ld. DRP. 14.4 We have heard the rival submissions and perused the materials available on record. This company has been considered as not a comparable in the case of Entercoms Solut ions Pvt . Ltd. in assessment year 2015-16 in ITA No.1826/Pune/2019 dated 25.10.2021 wherein held as under:- 8. We find the Hon'ble Jurisdictional High Court in the case of Pr. Commissioner of Income Tax Vs. PTC Software (I) (P) Ltd. (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) 1....
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....ry event of amalgamation. Thereafter, the Tribunal has analyzed how and what extraordinary event took place in that case and in such scenario, the company cannot be considered as comparable one and the relevant extracts in this regard are as follows: "13. ............. The learned Authorized Representative for the assessee has pointed out that though the CIT (A) says that there is no such amalgamation but his finding is totally incorrect. In this regard, reliance was placed on the ratio laid down by Pune Bench of Tribunal in Dover India (P.) Ltd. v. Dy. CIT [2017] 88 taxmann.com 115 (Pune - Trib.), wherein for assessment year 201011 itself, the said concern Accentia Technologies Ltd. was excluded being high end KPO service provider. Further, the Tribunal in BNY Mellon International 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 ext....
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.... is from ITES and therefore it is to be considered as a comparable. Before us, the Ld. Representative for the assessee has reiterated the submissions putforth before the TPO in order to justify exclusion of the said concern from the list of comparables. In particularly, it has been pointed out that for the very same assessment year, the Bangalore Bench of the Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. v. ITO, (2013) 38 taxmann.com 55 (Bang.) has excluded the said concern from the list of comparables in a similar situation following the decision of the Hyderabad Bench of the Tribunal in the case of Capital IQ Information Systems (India) Private Limited v. DCIT, (2013) 32 taxmann.com 21 (Hyd.). 15. We have considered the 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 ....
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....Para 22-30). Below is the relevant extract from the order for ready reference: 22. Regarding exclusion of Eclerx Services Ltd., the assessee argued that this company is a KPO company and hence, it is not a good comparable. The DRP observed that there is a thin line of difference between BPO and KPO services. KPO is termed as an upward shift of the BPO industry in the value. chain. Thus, BPO trying to upgrade itself as KPO is likely to render both BPO as well as KPO services in the process of evolution and therefore, such an entity cannot be considered strictly as either BPO or KPO. In view of the above, ITeS service's 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. 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. Ac....
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....wn case for A.Y. 2014- 15 in IT(TP)A No. 3181/Bang/2018 dated 21-5-2020 wherein it was observed as under :- "It is noted that this company is involved in high-end KPO services whereas assessee is providing IT enabled services by rendering remote data processing in the field of reinsurance. In our opinion functions performed by this company is not similar to that of assessee even though assessee before us also carries out certain services on contract basis. Ld. AR has placed reliance upon decision of Hon'ble Delhi High Court in case of Rampgreen Solutions (P.) Ltd. v. CIT [2015] 60 taxmann.com 355/234 Taxman 573/377 ITR 533 Hon'ble 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 b....
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....mpany as comparable by observing as under: 38. Having regard to the rival contentions and the material on record, we find we find that the Co-ordinate Bench of this Tribunal in the assessee's own case not only for the A.Ys 2009-10 for the A.Y 201011 has also considered this issue at Paras 6 to 9 in ITA No. 221/Hyd/2015 which reads as under: "6. The TPO has selected many comparables and among them M/s. Infosys BPO Ltd., TCS e-serve Ltd., and Eclerx Services Ltd., were objected to on the reason of high turnover 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 provide....
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....ely because the TPO in another case has held that there is an extraordinary event for which this company has to be excluded from the list of comparables, it cannot be excluded. Such claim has to be supported by evidence on record. As regards the functional dissimilarity and huge turnover and brand value is concerned, we find that this Tribunal in assessee's own case for A.Y.2009-10 while considering the comparability of the assessee with Infosys BPO Ltd., has taken note of 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 turn....
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....rables. 13. The assessee has raised ground No.1.16 for inclusion of following comparable companies: a. Cosmic Global Limited; b. Allsec Technologies Limited; c. BNR Udyog Limited; d. Bhilwara Infotechnology Limited; e. R Systems International Limited; f. ISN Global Solutions Private Limited; and g. E-Zest Solutions Limited; 13.1 At the time of hearing, the ld. A.R. pressed only following 4 comparables for inclusion: a. Bhilwara Infotechnology Limited; b. R Systems International Limited; c. ISN Global Solutions Private Limited; and d. E-Zest Solutions Limited; 13.2 The other comparables are not pressed. Accordingly, dismissed as not pressed. Bhilwara Infotechnology Limited & R Systems International Limited: 13.3 The ld. DR submitted that the Ld. DRP given findings that the above companies do not figure in the search matrix of the TPO. 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 wron....
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.... of comparable. Accordingly, we direct the AO/TPO to include this company ISN Global Solutions Ltd. in the list of comparables. E-Zest Solutions Limited: 13.8 Now coming to E-Zest Solutions Limited, the ld. DRP observed that on perusal of the annual report it was noted that the company has income from sale of services amounting to Rs.81.46 crores as per the information statement of profit and loss account given at page nos. 123-125 of the annual report. The company reported that it is exclusively engaged in the business of IT enabled services. This is the context of on segment reporting and is considered to constitute a single primary segment. As it is part of search matrix of the TPO and functionally similar to the assessee, the TPO is directed to include the comparable for the comparability analysis under ITES segment if it satisfies the filters adopted by the TPO. 13.9 However, the AO/TPO has not included E-Zest Solutions Ltd. in the list of comparables while determining the ALP. However, we direct the AO/TPO to pass the above order in conformity with the order of the Ld. DRP as recorded in para 13.8 above. This ground of appeal of the assessee is allowed. Corporate Tax Iss....
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....at the ESOP is uncertain by not appreciating the fact that the ESOP expenses are actual expenses claimed by the Appellant, based on actual invoices issued and actual payments made. Non-Applicability of section 195 of the Act 2.9. The learned AO has erred in law and on facts by disregarding that the ESOP expense is liable to TDS under section 192 of the Act as "perquisite" in the hands of the employees and appropriate taxes are deducted and remitted by the Appellant, which is evidenced by sample Form 16 copies furnished before the honorable AO and DRP. 2.10. The learned AO has erred in law and on facts by stating that the provisions of section 195 of the Act shall be applicable on the remittance of reimbursement towards ESOP without taking cognizance of the fact that there was no "income" element arising to the recipient from such remittances. 2.11. The learned AO has erred in law and on facts by stating that the provisions of section 195 of the Act have not been complied with and consequently reimbursement towards ESOP shall suffer disallowance under section 40(a)(i) of the Act, without evaluating the fact that the provisions of section 195 of the Act are not applicable....
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....as no such information of comparables is used in computing their margins. Such a TP study will thus be lopsided. There is no such intention of the legislature to give such treatment is also evident from the fact that the TP analysis and ALP is computed by TPO before the AO passes the assessment order. If the intention of the legislature was that the operating margins of the assessee should be enhanced on the basis of disallowance or additions made by the AO then it could have specified that a preliminary draft assessment order will first be passed by the AO after making disallowances or additions and thereafter the TP study would be carried out to determine ALP by the TPO which can then be added to income of the assessee and then AO would pass the final draft assessment order. The DRP has correctly placed reliance on the decision on the case of Cushman and Wakefield (India) (P) Ltd (Para 2.12.3 of DRP order page 47-48). The same is reiterated. 14.3 The ld DR further stated that the assessee is getting remunerated on cost plus basis. So its operating cost is what it has declared to its AE for purposes of remuneration on above basis. So ESOP expenditure is part of such expense claim....
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....articipate in share based compensation scheme of the ultimate holding company, whereby the shares of the ultimate holding company are granted to the employees of the assessee on satisfying certain conditions. As per Note 28 of the financial statement, the assessee had two types of share based compensation scheme operational, namely, Employee Stock Purchase Plan (ESPP) and Employee Stock Incentive Plan (ESIP) (hereinafter referred to as ESOP Scheme). 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 pro....
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....loyees stock option" to mean option given to whole time directors, officers or the employees of the company, which gives such directors, officers or employees, the benefit or right to purchase or subscribe at a future rate to securities offered by the company at a pre-determined price. In an employees stock option plan a company undertakes to issue shares to its employees at a future 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 o....
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....bmissions. It is clear from the facts on record that there was an actual issue of shares of the parent company by the assessee to its employees. The difference, between the fair market value of the shares of the parent company on the date of issue of shares and the price at which those shares were issued by the assessee to its employees, was reimbursed by the assessee to its parent company. This sum so reimbursed was claimed as expenditure in the profit & loss account of the assessee as an employee cost. The law by now is well settled by the decision of the Special Bench of the ITAT Bangalore in the case of Biocon Ltd. in ITA No.248/Bang/2010, A.Y. 2004-05 and other connected appeals, by order dated 16.07.2013, wherein it was held that expenditure on account of ESOP is a revenue expenditure and had to be allowed as deduction while computing income. The Special Bench held that the sole object of issuing shares to employees at a discounted premium is to compensate them for the continuity of their services to the company. By no stretch of imagination, we can describe such discount as either a short capital receipt or a capital expenditure. It is nothing but the employees cost incur....
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....y and not that of the Assessee. Admittedly, the shares were issued to employees of the Assessee and it is the Assessee who has to bear the difference in cost of the shares. The expenditure is necessary for the Assessee to retain a health work force. Business expediency required that the Assessee incur such costs. The parent company will be benefitted indirectly by such a motivated work force. This will be no ground to deny the deduction of a legitimate business expenditure to the Assessee as laid down by the Hon'ble Supreme Court in the case of Sassoon J.David (supra). 21. The reference by the CIT(A) to the provisions of Sec.40A(2)(b) of the Act is again without any basis. The price of the shares of NNAS is arrived at by applying the average market price for the period 3rd October, - 17the October, 2005 in the Copenhagen Stock Exchange. The price so arrived at and the price at which shares are issued to the employees of the Assessee is the benefit which the employees get under the ESOP. The Assessee or its parent company can never influence the stock market prices on a particular date. There is no evidence or even a suggestion made by the CIT(A) in his order. There is no basis t....
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....ce of a subsidiary. We are of the view that the factual basis on which the CIT(Appeals) distinguished the decision of the Mumbai Bench of ITAT in the case of Accenture (supra) is erroneous. 23. With regard to the observations of the CIT(Appeals) that the ESOP actually benefits only the parent company, we are of the view that the expenditure in question is wholly and exclusively for the purpose of the business of the assessee and the fact that the parent company is also benefited by reason of a motivated work force would be no ground to deny the claim of the assessee for deduction, which otherwise satisfies all the conditions referred to in section 37(1) of the Act. The decision of the Hon'ble Supreme Court in the case of Sassoon J. David & Co. (P) Ltd. (supra) and the Hon'ble Karnataka High Court decision in the case of Mysore Kirloskar Ltd. (supra) clearly support the plea of the assessee in this regard. 24. We are of the view that in the facts and circumstances of the present case, the expenditure in question was wholly and exclusively for the purpose of the business of the assessee and had to be allowed as deduction as a revenue expenditure. 25. For the reasons given ab....
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.... 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 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....