AI Drafter 
TaxTMI 
TaxTMI 
2023 (3) TMI 1295
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....s read with rectified directions of the Hon'ble Dispute Resolution Panel ('the DRP') and the order passed by the Deputy Commissioner of Income Tax, Transfer Pricing Officer 3(2)(1) ("the TPO"), New Delhi post DRP directions, are bad in law and void ab-initio. 2. The AO has erred in law and on the facts and circumstances of the case in determining the total income of the Appellant at INR 4,38,56,650/- as against returned income of INR 18,05,090/- and thereby made an upward adjustment of INR 4,20,51,556/-. Part I - Transfer Pricing Grounds 3. That on facts of the case and in law, the DRP/TPO/AO ignored the principle of natural justice by not dealing with the contentions of the Appellant with respect to the rectification application filed by the Appellant with the TPO/AO. 4. That on facts and in law, the DRP/TPO/AO have grossly erred by charging interest on credit period granted by the company under normal trade practices by: 4.1.1. Identifying outstanding receivables as a separate international transaction; 4.1.2. re-characterizing the nature of outstanding receivables as loan advanced to associated enterprises ("AEs"); 4....
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....ppellant. 11. That on facts of the case and in law, the DRP/TPO/AO has grossly erred by failing to include foreign exchange gains/losses and provision for doubtful debts while computing the operating margins of the Assessee and the comparable companies without appreciating the fact that the Hon'ble ITAT has upheld the treatment of foreign exchange gain/ loss as operating in nature in Appellant's own case. 12. That on facts of the case and in law, the DRP and TPO/AO have erred by not considering that the adjustment to the arm's length price, if any, should be limited to the lower end of the 5 percent range as the Appellant has the right to exercise this option under the second proviso to section 92C(2) of the Act. ' 13. That on the facts and in the circumstances of the case, the Ld. DRP/TPO/AO have erred by not making suitable adjustments to account for differences in the risk profile of the Appellant vis-a-vis the comparable companies 3. In addition to the above, the assessee has also raised additional/ supplementary grounds of appeal which read as under: "4..1.5 "Without prejudice not providing credit period of 150 days for receivable....
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....d Technologies Ltd. fails the service filter of 75%. i.e. income from services is less than 75% of total income. 4. The Hon'ble DRP has erred in law and on facts by exclusion of M/s Accentia Technologies Ltd. as comparable without considering the fact that there is no abnormal fluctuation in the profit earning capacity of the comparable. 5. The Hon'ble DRP has erred in law and on facts by exclusion of M/s TCS E-serve International Ltd. as comparable without considering the fact that it is a ITES/BPO Service providing company and the services regarding software testing, verification and validation of software which are termed as software development are basically covered under BPO services. 6. The Hon'ble DRP has erred in law to direct to exclude M/s Infosys BPO Ltd company on account relying on the judgement of Hon'ble ITAT for providing non- Comparable services and on account of its large scale of operations without considering the fact that many comparables being selected by this office and assessee has argued against the Infosys BPO Ltd. only because of its high margin. 7. The Hon'ble DRP has erred in law and on facts by directing ....
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....to the TPO for determining ALP of assessee's international transaction, the TPO accepted TNNM as the most appropriate method. However, the TPO excluded certain comparables which were included by the assessee and also included certain comparables and, accordingly, the TPO worked out a transfer pricing adjustment of Rs. 21,38,93,273/-. 10. The assessee raised objections before the DRP and was successful in getting certain comparables excluded against which the revenue is in appeal. However, the assessee was unsuccessful before the DRP in respect of the exclusion of certain comparables against which it is in appeal. 11. At the very outset, the ld. counsel for the assessee, referring to Ground No. 11 strongly pleaded that foreign exchange fluctuation gain should have been considered as operating revenue of the assessee as well as that of the comparables. 12. We are of the considered view that in light of the business profile of the assessee, this contention raised on behalf of the assessee about inclusion of foreign exchange gains in operating revenue finds merit. Apparently, it seems that foreign exchange gain earned by the assessee is in relation to the revenue earned from i....
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.... fails in specifically pointing out the extra risks undertaken by the comparables, then, of course, there cannot be any question of granting risk adjustment. Under the transfer pricing regime, initial onus is always on the assessee to show the reasons for claiming any specific adjustment by pointing out differences between it and the comparables. Risk adjustment can be allowed provided the assessee places on record some appropriate material to demonstrate that the risks undertaken by the comparable companies were relatively more than it, warranting downward adjustment in their profit rates. Further, the variation in such risks, if any, should be capable of quantification on some reasonable and logical basis. 7.3. The ld. AR stated before us that the assessee was not having any risk at all inasmuch as its services were to be compensated by the AE with an appropriate mark-up in comparison with the full-fledged risk bearing comparable companies. We are not inclined to accept such a generalized and bald statement. The mere fact that the assessee is a captive unit rendering ITES to its AE alone, does not per se make it a no-risk entity. There are several risks attached to such ....
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....all basis vis-à-vis the assessee, we are disinclined to grant any risk adjustment." 17. Now coming to the selection of comparable, the assessee is aggrieved against the inclusion of: a. Eclerx Services Limited b. ICRA Techno Analytics Limited c. Acropetal Technologies Limited. 18. The assessee also seeks inclusion of : a. CG Vak Software and Exports Ltd, and b. Calibre solutions point Limited. 19. We will first deal with the companies which have been included by the TPO in the final set of comparables and the assessee claims them to be incomparable. 20. The common objection in respect of three comparables objected by the assessee is that all are functionally different and are functionally not comparable. It is further stated that all the three companies namely, Eclerx Services Limited, ICRA Techno Analytics Limited, Acropetal Technologies Limited are engaged in diversified services including software services, consultancy, engineering services etc. It is also pointed out that Eclerx is a KPO entity, which offers financial services also. 21. We have given thoughtful consideration to the orders of the authorities belo....
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....relevant segment of this company in the list of comparables. The TPO is directed to include the operating profit/operating costs of the ITES segment of this company in the list of comparables, after due verification of the necessary figures for determination of the operating profit margin etc." 23. In so far as inclusion of Calibre Business Point Business Solutions is concerned, we find that the Coordinate Bench had an occasion to consider three comparables together, namely, R System International Ltd, Jindal Intelicom Private Limited and Calibre Business Point Business Solutions. The relevant findings of the coordinate bench read as under: "12.1.2. After considering the rival submissions and perusing the relevant material, it is noticed that the assessee company is having financial year ending covering the period 1.4.2009 to 31.3.2010. In that view of the matter, a valid comparison can be made only if the comparable companies too have the same financial year. In this regard, we consider it appropriate to note the relevant part of sub-rule (4) of Rule 10B which provides that: "the data to be used in analyzing the comparability of an uncontrolled transaction with an inte....
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....evant financial year are not directly available without any apportionment or truncation, then these companies should not be considered as comparable. 24. Respectfully following the findings of the co-ordinate bench [supra], we direct accordingly. 25. At this stage, it would be proper to address to the comparables sought by the revenue in its appeal which are related to Infosys BPO Limited, Acentia Technologies Limited, TCS E-Serve Limited. 26. The coordinate bench has dealt with these comparables in Assessment Year 2010-11 as under: "Infosys BPO Limited 10.5.1. The TPO included this company in the list of comparables. The assessee's objections against its inclusion were overturned. 10.5.2. After considering the rival submissions and perusing the relevant material on record, we find from the Annual report of this company, which is available on page 449 onwards of the paper book, that there was acquisition by this company of McCamish Systems LLC. Such information is available on page 456 of the paper book. Acquisition of McCamish Systems LLC during the year, being an extraordinary financial event, renders it incomparable. Following the reasons take....
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....rall same segment, cannot be excluded due to somewhat different nature of such overall activity. An examination of the comparables chosen by the assessee, which have been accepted by the TPO, also satisfy only the test of overall similarity and not the peculiar similarity, as has been now contrastly contended for the exclusion of this company. This argument, therefore, fails. 10.3.3. In so far as the objection of the ld. AR about the high profit/high turnover of this company is concerned, we find that the Hon'ble Delhi High Court in ChrysCapital Investment Advisors (India) P. Ltd. Vs. DCIT has held , vide its judgment dated 27.4.2015, that high profit or high turnover is not a criteria to exclude an otherwise comparable company. It is further noticed that the Hon'ble Delhi High Court in CIT Vs. Agnity India Technologies (P.) Ltd. (2013 ) 219 Taxman 26 (Del) examined the comparability of Infosys Technologies from the angle of its inclusion or otherwise in the list of comparable of Agnity India Technologies, a captive unit providing ITES to its AE alone. In that case, the TPO treated three companies as comparable, namely, Satyam Computer Service Ltd., L&T Infotech Ltd. and I....
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..../2013) vide its order dated 23.4.2015. In view of the fact that there was merger of Asscent Infoserve Pvt. Ltd. with Accentia Technologies Ltd. by way of amalgamation during the year itself, we hold that this company cannot be considered as comparable due to this extra-ordinary financial event. Accordingly, the same is directed to be excluded from the final list of comparables." 27. Respectfully following the findings of the coordinate bench [supra] in respect of this comparable, we direct accordingly. 28. The revenue has also sought exclusion of Cosmic Global Limited and Informed Technologies India Ltd. 29. In so far as Cosmic Global Limited is concerned, we find that this Tribunal in earlier years i.e. Assessment Years 2009-10 and 2010-11 has held that export earnings filter need not be applied which has been followed by the DRP and, therefore we do not find any merit in exclusion of these comparables and it will remain in the final set of comparables 30. In so far as Informed Technologies India Limited is concerned, it is contended that the turnover of this company is more than Rs. 1 crore and, therefore, passes turnover filter applied by the Assessing Officer wherea....
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....,02,73,60,940 97,80,02,738 2,96,67,713 36. Before us, the ld. counsel for the assessee strongly stated that the agreement between the assessee and its AE does not provide for any charging of interest and hence there cannot be any question of notional/hypothetical income as determined by the AO/TPO. 37. This contention of the assessee does not find any favour from us. In our considered opinion, Chapter X of the Act has been enshrined to determine the income from an international transaction at ALP, being in the same manner as is determined between two independent parties, which means that if income is not charged or under charged by an Indian entity from its foreign AE, which ought to have been properly charged if the transaction had been between two independent parties, then such under charged or uncharged income needs to be brought to tax by determining ALP of the international transaction giving rise to such income. 38. Our view is fortified by the fact that Finance Act 2012 has inserted Explanation to Section 92B with retrospective effect from 1.4.2002. This retrospective amendment covers the assessment year under consideration. Therefore, apart from any long-term....