TaxTMI 
TaxTMI 
2023 (4) TMI 31
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.... in circumstances of the case the Ld. DRP erred in sustaining the addition of Rs. 4,09,29,957/- made by TPO u/s 92CA of the Act. 2. That the Ld. DRP has has erred in sustaining the filters applied by the TPO/ AO which are arbitrary and legally unjustified thereby rejecting certain comparable companies which were selected by the appellant company to benchmark the international transaction with AE. 3. That the Ld. DRP has erred both in facts and in law in accepting inappropriate comparables selected by the TPO/ AO, which in terms of F.A.R. are materially different with the appellant company. 4. That the Ld. DRP erred in law and on facts while sustaining the order of TPO/AO without making adjustment on account of differences in the risk profile of the appellant vis-à-vis the comparable companies. 5. That the Ld. DRP erred in law and on facts while sustaining the addition made by the TPO/ AO on account of working capital adjustment on receivables in U. S. dollars from the US holding company by the Philipines Branch of the assessee company, which in an independent PE liable to tax in Philipines. 6. The Ld. DRP has erred in law and on f....
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....isks? 4. Whether the Hon'ble DRP was justified in holding that Accentia Technologies Ltd. is a KPO, even while in reality the company is engaged in Medical Transcription, Income from Coding, Billing and collection which are a low-end IT enabled service? 5. Whether, the DRP was justified in considering the Forex gain/loss as operating in nature for determination of ALP, when same has no relation with the business of the assessee? 6. Whether the DRP-2 was justified in directing the AO to re-compute the disallowance u/s 8D by excluding investment which do not yield any exempt income? 7. The appellant craves to be allowed to add any fresh ground of appeal and/or delete or amend any of the grounds of appeal." 3. A reference under section 92C(1) of the Act was made by the DCIT, Circle : 17(1) New Delhi [Assessing Officer] for determination of Arms Length Price in the international transactions undertaken by the assessee during the financial year 2010-11 relevant to assessment year 2011-12. Business profile of the assessee and the Group: 4. The assessee M/s. vCustomer Services India Pvt. Ltd. [for short vCustomer India] is a wholly owned su....
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....td. 56.72 5. Infosys B.P.O. Ltd. 52.27 6. Jindal Intellicom Ltd. 47.47 7. Microgenetic Systems Ltd. 31.52 8. TCS E-Serve Ltd. 102.70 9. Acropetal Technologies Ltd. (Seg) 44.72 Average 58.77 7. Accordingly the Arms Length Price of the international transactions related to IT enabled services was bench marked by the TPO taking the Arms Length Price at a margin of 58.77% and proposed adjustment under section 92CA at Rs.6,91,43,062/-. Draft assessment order was passed on 20.03.2015 proposing the said adjustment under section 92CA of the Act and also disallowance under section 14A read with Rule 8D at Rs.14,94,534/-. The assessee submitted its objections before the DRP and the DRP by order darted 30.11.2015 directed the Assessing Officer to exclude Accentia Technologies Ltd. and Eclerx Services Ltd. from the list of the comparables selected by the TPO and the rest of the comparables sustained by the TPO was selected by the DRP. 8. Before us the ld. Counsel for the assessee submits that the assessee is agitating in its appeal for inclusion and exclusion of the following comparables from the final set of comparables. ....
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.... Delhi HC decision in assessee's own case, the panel directs the TPO/AO to delete this comparable. 13. Further we have also perused the orders of the Tribunal and the Hon'ble Delhi High Court wherein these two comparables have been excluded. Thus, we do not see any infirmity in the directions of the DRP for exclusion of Accentia Technologies Ltd. and Eclerx Services Ltd. from the final set of comparables. The grounds raised by the Revenue on this issue are rejected. CG VAk Software Limited : 14. Coming to assessee's appeal, the inclusion of CG VAk Software and Exports Limited in the final set of comparables the ld. Counsel for the assessee submits that the Tribunal in assessee's own case for the assessment year 2010-11 by order dated 4.11.2015 in ITA. No. 1066/Del/2015 has accepted for inclusion of this company as comparable. The ld. Counsel for the assessee further submits that the decision of the Tribunal was also upheld by the Hon'ble Delhi High Court vide its order dated 27.05.2016 in ITA. 340/2016. The ld. Counsel submits that these orders are placed at page Nos. 442-443 and 455 in Volume 2 of the paper book. The ld. Counsel further submits that the reason for exclus....
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....ted income from data processing and BPO services income at Rs.1.75 crores. Therefore, the ld. DR submits that the TPO rejected this company as comparable for the reason that the main income is of income from other sources and it fails service income filter. The ld. DR submits that the contention of the assessee that this comparable has been rejected on low turnover is not correct. 19. Heard rival submissions perused the orders of the authorities below. On perusal of the order of the TPO, we observe that Informed Technologies India Ltd. was rejected by the TPO for the reason that as per the annual report of the company income from data processing and BPO services was shown at Rs.1.75 crores out of total income of the company at Rs.4.08 crores. The TPO observed that out of the total income of Rs.4.08 crores the other income is Rs.2.32 crores and hence its main income is from other income and, therefore, it failed service income filter and, therefore, not considered as comparable. The TPO also observed that the company has rental income of Rs.2.08 crores and the expenses corresponding the same are not ascertainable. 20. The ld. Counsel, however, submitted that the TPO has exclud....
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....riate method to determine the ALP of the international transaction pertaining to the provision of IT support services. The TPO in the order accepted only 7 out of the 11 comparable companies and rejected the rest based on reasons that one of them, Fortune Infotech Ltd. ("FIL") had a different financial year ending, the other two - Kirloskar Computer Services Ltd ("KCSL") and Mercury Outsourcing Management Ltd. ("MOML") had a turnover of less than 1 Crore and finally, Genesis International Corporation Ltd ("GICL") was rejected because it seemingly had a negative growth graph. 14. The Revenue is in appeal before this Court questioning the admissibility of the above mentioned comparables while computing Arm's Length Price regarding the IT Support services after the TPO and AO rejected the above mentioned companies but was later allowed by the CIT (A) and ITAT. While the AO had confirmed the findings of the TPO, the Ld. CIT(A) after considering the Assessee's submissions accepted all the four companies rejected by the TPO. The revenue submits that Fortune Infotech Ltd. was correctly rejected by TPO because the company had different financial year ending on December, 20....
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....ancy..engineering services, web development & hosting and subsequently diversified itself into the domain of business analytics and business process outsourcing." (Pg 231/91) Revenue recognition. In the note detailing of the revenue recognition which also form a part of its annual report it has been stated that its revenue stream consisted of software development consultancy, engineering services, web development and hosting. Thus ICRA Techno Analytics had more than one segment. (Pg. 231/FS-1) (a) No segmental information. Segmental information is available for two segments i.e, services and sales. However, it is evident from the annual report that the service segment comprises of software development, software consultancy, engineering services, web development, web hosting. No segmental information for BPO services. (Pg. 279-280/FS-1) " 27. The ld. Counsel further submits that this company has been excluded by the Bangalore bench of the Tribunal in the case of Cerner Healthcare Solutions (P.) Ltd. Vs. ITO [(2017) 79 taxmann.com 64 (Bangalore - Trib.) for assessment year 2010-11 for the reason that ICRA Techno Analytics Ltd. was into diversified activi....
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.... in functions, assets and risks between the assessee and this company. The ld. Counsel further submits that in assessee's own case this company was excluded by the Tribunal for assessment year 2010-11 vide order dated 14.11.2015 and this order of the Tribunal was also affirmed by the Hon'ble Delhi High Court vide order dated 27.05.2016 which is placed at page No. 455 of Volume 2 of the paper book. 32. On the other hand, the ld. DR submits that Infosys B.P.O. Ltd. was excluded in the assessment year 2010-11 for the reason that there was acquisition of the company and there is no such acquisition during the assessment year under consideration and, therefore, the facts are entirely different. 33. Heard rival submissions perused the orders of the authorities below. The Tribunal in assessee's own case for assessment year 2010-11 excluded Infosys B.P.O. Ltd., observing as under:- "34. Infosys BPO: In the case of Techbook International Pvt. Ltd. (supra)/ the Tribunal has excluded this company from the list of comparables/by observing as under: 10.5.2. After considering the rival submissions and perusing the relevant material on record, we find from the Annual repor....
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....ally similar, high turnover has no correlation to high profits and when they are functionally similar large scale operation is no ground to reject the same. In respect of TCS e-services, he held that the contention of the assessee that its transactions with Citi Bank group are not shown in the Notes to Accounts cannot be accepted because once there is change in the ownership of the erstwhile company, the Citi group of companies cannot be held to be related to TCS e services. 85. Ld. DR brought to our notice that for the AY 2010-11, a Coordinate Bench of this Tribunal extensively dealt with the comparability of these two companies and reached a conclusion that these two companies are valid comparables for the back office support transactions. He submitted that there is no change of functions of these two companies from earlier years. So also the functions of the assessee. He, therefore, urged to uphold the action of the Id. DRP for this year. 86. In reply, it is the argument of the Id. AR that the order for AY 2010-11 was pronounced on 5.1.2018 and the assessee is carrying the matter in appeal to higher forums. However, he brought to our notice that a Coordinate Be....
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....mprise of transaction processing and technical services including software testing, verification and validation, for which no segmental bifurcation is available, in the absence of which margins of various segments would be difficult to be compared. Ld. AR submitted that these observations are applicable to the case of the assessee also on all fours. He further submitted that these observations of the Tribunal are upheld by the Hon'ble jurisdictional High Court in Principal CIT v. B.C. Management Services (P) Ltd. [2018] 89 taxmann.com 68 (Delhi), in the following manner:- On a reading of the order of the Tribunal in BC Management case (supra), it is clear that the Tribunal did not find that TCS e-Serve is functionally dissimilar to the BC Management services (P) Ltd. (supra). In spite of the same, the Tribunal recorded that the employee cost base at more than 64 times and the turnover at more than 67 times as compared to the assessee therein suggests that the assets employed by the TCS e-serves along with huge intangibles in the form of brand value impacted the PLI and vitiated the comparability under FAR analysis. The ITAT observed that though there is a close functio....
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....ry event has happened. It was also not brought to our attention as to how there are material differences in functions, assets and risks. However, in the case of Cadence Design Systems (I) (P.) Ltd. Vs. ACIT (supra) the Tribunal excluded Infosys B.P.O. Ltd. for the assessment year 2011- 12 holding that it is not as good comparable accepting the submissions of the assessee that Infosys B.P.O. Ltd. is having significantly large operations and is providing high-end integrated services for business platforms, customer service, outsourcing service, functions and accounting on account of resources outsourcing medical process, outsourcing sales and fulfillment, sourcing and procurement outsourcing etc. and also having goodwill of Rs.2.27 crores. We observe that all these factors have not been examined by the TPO while including this company as comparable. Therefore, we restore this comparable to the file of the AO/TPO to re-examine in detail keeping in view the decisions of the Tribnunal in assessee's own case and the Delhi Bench in the case of Cadence Design Systems (I) (P.) Ltd. Vs. ACIT (supra) and decide in accordance with law for the purpose of exclusion/inclusion in the final set of ....
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....g global clients of TCS Ltd. It cannot be compared with the assessee company' which has no significant intangibles. (Pg. 515/FS-II) (d) Extraordinary economic event. As per Annual Report of the company there is amalgamation with CitiCorp Credit Services India Ltd. Relevant extracts of the AR as under: 1) "The Company allotted 1,600,000 (previous year: 1,600,000) equity shares of Rs. 10 each as fully paid up pursuant to the scheme of amalgamation with Citicorp Credit Services India Limited without payment being received in cash." (Pg. 481/FS-II) Excluded in 1) The Tribunal in assessee's own case for assessment year 2010-11 held that TCS e-service Ltd. is also in the business of rendering technical services such as software testing, verification and validation. But no segmental details are available. This issue was restored to AO to examine the contention of the assessee. (Pg. 419 at 440/ Vol 2) However, for A.Y. 2011-12, coordinate benches have clearly excluded it as incomparable in following cases:- i) Orange Business Services India Solutions (P.) Ltd. [2016] 71 taxmann.com 206 (Delhi - Trib.) (pg. 579 at 586 of....
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....on of software etc. It was further observed that since the functional profile of this company on a boarder basis was not different from that of the assessee, both being involved in rendering ITES, this company was to be retained as comparable. 28. Ld. counsel referred to page 503 of the PB, wherein the annual report of this company is contained and pointed out that both the background and principal activity of this company were identical as that in the case of TCS e-Serve International Ltd., reproduced earlier, which was as under: "TCS e-Serve Limited is engaged in the business of providing information Technology- Enabled Services (ITES) Business Processing Outsourcing (BPO) services, primarily to Citigroup entities globally." 29. Ld. counsel further referred to page 515 of the PB, wherein the notes forming part of the financial statements are contained and in regard to the segmental information it has been observed that the company was engaged in business process outsourcing (transaction processing) services to the Banking & financial services industry (BFSI), which was considered as a single segment. He, therefore, pointed out that the segmental informa....
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....ry difficult, if not impossible, to find out a ditto comparable. A company which satisfies the broader parameters of comparability in the overall same segment, cannot be excluded Due to somewhat different nature of such overall activity. An examination of the cornparables chosen by the assessee, which have been accepted by the TPO, also satisfy only the Lest 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 Chrys Capital 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 Tasman 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 prov....
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....Seg) : 42. The ld. Counsel for the assessee submits that the TPO included this company as comparable holding that this company has engineering design, service, information technology services, health care segments and the engineering design segment is considered as comparable. The ld. Counsel submits that there are material differences in functions, assets and risks acquisition, health care and the primary services of the company was health care services and significant R & D activities as against IT enabled services of the assessee company. The ld. Counsel further submitted as under:- "(a) Acquisition: "client base expansion is also the core focus area of our acquisitions. In line with this strategic focus, we acquired Line Beyond Inc. USA and Optech Consulting Inc. USA. (Pg. 641 & 648/FS-III) (b) Functionally different. Acropetal Technologies Ltd, is a functionally different company. It renders service in the field of engineering design, health-care enterprise solutions and IT infrastructure solutions. Annual Report of the company at pg. 8 states as under: It comprised of architectural, structural, electrical, plumbing, steel detailing, and utilities....
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....09 (Hyd. - Trib.) had held that Acropetal Technologies Ltd, was not a good comparable in the BPO segment. As per the Ld. AR M/s. Excellence Data Research P. Ltd, was rendering back office data creation, content development and support services which were not comparable to what assessee was doing. Though the decision of the Hyderabad Bench was for A. Y. 2009-10, as per the Ld. AR, M/s. Acropetal Technologies Ltd, was doing the very same business during the relevant previous year also and therefore it could be considered as a good precedent. 22. Per contra, Ld. DR submitted that TPO had considered the argument of the assessee that BPO and KPO had to be distinguished. According to him, Acropetal Technologies Ltd, was giving engineering design services and the assessee was rendering insurance support services. Though these services did not fit in the same mould, the level of expertise required stood more or less on the same pedestal. According to him, applying the yardsticks laid down by Hon'ble Delhi High Court in the judgment of Rampgreen Solutions (P) Ltd. (supra), Acropetal Technologies Ltd, could be taken as a good comparable. 23. We have perused the orders a....
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.... constrained to take a view that engineering design services segment of M/s. Acropetal Technologies Ltd, (seg), cannot be considered as a proper comparable for the TP study of the assessee. 46. This decision applies to the facts of the assessee's case as there is no dispute that Acropetal Technologies Ltd. is having engineering design service segment, which was compared to that of the assessee. The type of services that was being provided by Acropetal Technologies Ltd. was not comparable with the type of services that the assessee is providing. Acropetal Technologies Ltd. was providing high-end services in the engineering design services and whereas the assessee is providing ITES services to its AE. In view of the above, we direct the AO/ TPO to exclude Acropetal Technologies Ltd. from the final set of comparables. 47. Coming to ground No. 4 of the grounds of appeal of the assessee in not granting risk adjustment by DRP/TPO the ld. Counsel submits that appropriate direction may be given to the TPO to determine the adjustment on account of risk in view of the following decisions:- (i) HyundaI Rotem Company ITA. No. 510/Del/2016 dated 22.11.2017 (Del); (ii) Ho....
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....rrency and not as per prime lending rate as applied by the TPO, following the judgement in the case of CIT Vs. Cotton Naturals (I) (P.) Ltd. [276 CTR 445], the Tribunal directed the TPO to re-compute the working capital adjustment on the basis of interest as per US currency. This decision of the Tribnunal has been confirmed by the Hon'ble Delhi High Court by dismissing the appeal of the Revenue observing that the issue consisting the rate of interest for working capital adjustment is covered against the Revenue and in favour of the assessee in terms of decision of this court in CIT Vs. Cotton Naturals (I) (P.) Ltd. (supra). Therefore, it is the submission of the ld. Counsel that TPO was obliged to re-compute working capital on the basis of interest as per US currency. 53. On the other hand, the ld. DR submits that the decision in the case of CIT Vs. Cotton Naturals (I) (P.) Ltd. (supra) will not apply to the facts of the case. 54. We observe that similar issue has been decided by the Tribunal in assessee's own case for assessment year 2010-11 wherein it has been held that interest has to be determined as per US currency and not as per the prime lending rate as applied by the ....
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....e. US $. Interest rate applicable to loans granted and to be returned in Indian rupees would not be the relevant MP comparable. Even in India, interest rates on FCNR accounts maintained in foreign currency are different and dependent upon the currency in question. They are not dependent upon the PLR, which is applicable to loans in Indian rupee. The PLR, therefore, would not be applicable and should not be applied for determining the interest rate in the extant case. PLR is not applicable to loans to be repaid in foreign currency. The interest rates vary and are thus dependent on the foreign currency in which the repayment is to be made. The same principle should apply. Cotton Natureals (I) (P) Ltd. Vs. CIT (2015) 169 TTJ (Del) 685 (P) Ltd. VS. CIT (2015) 169 TTJ (Del) 685 affirmed." 58. Therefore, interest has to be determined as per US currency and not as per the prime lending rate, as applied by TPO. Under such circumstance, we set aside the impugned order and remit the matter to the file of TPO for fresh determination on account of TP adjustment towards interest not realized from its AE on the debts arising during the course of business. Ground is allowed for statistic....
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....r applied Rule 8D(2)(iii) and disallowed Rs.14,94,534/- being 0.5% of average value of investment, as income attributable for earning dividend income. The DRP considering the submissions of the assessee held that the main contention of the assessee is that the investments in mutual funds investment from which dividend earned is not exempt and should not be considered for computation under Rule 8D and accordingly directed the Assessing Officer to re-compute the disallowance under Rule 8D by excluding investments which do not yield any exempt income and disallowance should be restricted to the dividend income declared by the assessee. Against the directions of the DRP, both the assessee as well as the Revenue are in appeal. 59. The ld. Counsel for the assessee submits that DRP has erred in sustaining the disallowance under Rule 14A read with Rule 8D in absence of any finding that the appellant had incurred the impugned expenditure for the purpose of earning exempt income. Reliance was placed on Maxopp Investment Ltd. Vs. CIT [(2012) 347 ITR 272 (Del.)] and H T Media Ltd. Vs. PCIT [(2017) 399 ITR 576 (Del.)]. 60. On hearing both the sides and perusing the orders of the Assessing....