TaxTMI 
TaxTMI 
2022 (7) TMI 1401
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.... enabled services undertaken by NTT Data IPS with its associated enterprises ('AEs'). 3. Learned AO/ DRP erred in assessing the total income of the Appellant at INR 66,72,07,110, as against returned income of INR 37,61,04,750. 4. Learned AO/ DRP erred in determining a sum of Rs 8,47,74,080 as balance tax payable by the Appellant. Ground of appeal relating to Transfer pricing matters 5. Learned TPO erred in law and in facts, by not accepting the economic analysis undertaken by the Assessee in accordance with the provisions of the Act read with the Rules and conducting a fresh economic analysis for the determination of the arm's length price in connection with the impugned international transactions and holding that the Assessee's international transactions are not at arm's length. 6. Adjustment on account of re-determination of arm's length price for the transaction of provision of IT enabled services by the Appellant to its AEs 6.1. Learned TPO/ AO/ DRP erred in law and facts, by incorrectly applying the following quantitative and qualitative filters: a) Rejecting certain comparable companies for having different accoun....
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.... iv) BNR Udyog Ltd v) Jeevan Scientific Technology c. Rejecting companies additionally introduced by the Appellant even though the companies are functionally comparable to the Appellant: i) Informed Technologies India Limited ii) Sundaram Business Services Limited iii) ACE Software Exports Ltd iv) Hartron Communications Ltd. 6.4. Learned AO/ TPO/ DRP erred, in law and facts, by exercising powers under section 133(6) of the Act to obtain information which was not available in public domain and relying on the same for comparability purposes. 6.5. The learned TPO/ AO have erred, in law and in facts, by not making suitable adjustment to account for differences in working capital position of the Assessee vis-à-vis the comparables. 6.6. The learned TPO/ AO have erred, in law and facts, by not making suitable adjustments to account for differences in the risk profile of the Assessee visà- vis the comparables. 7. Adjustment on account of notional interest on outstanding receivables 7.1. The learned TPO/ AO grossly erred in determining a transfer pricing adjustment on account of ....
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....ed AO has erred, in law and in facts, in initiating penalty proceedings under section 274 read with section 271(1)(c) of the Act. The Appellant submits that each of above grounds is independent and without prejudice to one another." 2. At the time of hearing, assessee has not pressed ground Nos.1 to 6.2. Hence, these grounds are dismissed as not pressed. 3. In Ground No.6.3(a) assessee seeks exclusion of following 3 comparables only: a) Infosys BPO Ltd. b) Eclerx Service Ltd. c) SPI Technologies India Pvt. Ltd. 3.1 The assessee not pressed exclusion of following comparables, which are dismissed as not pressed. : a) Bhilwara Technologies Ltd. b) One Touch Solutions Pvt.Ltd. 3.2 The Ld. A.R. submitted as follows: (a) Infosys BPO Limited Functionally different 3.3 The company provides a gamut of services in horizontal and vertical areas that comprise of sourcing and procurement, customer services, financial & accounting, legal process outsourcing, sales & fulfilment, analytics, human resources outsourcing, Industry solution, digital business services, financial services, manufacturing, energy and utilities, com....
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....s India Pvt. Ltd., vs. The Addl./Jt./Dy./Asst. Commissioner of Income Tax/ITO, National Faceless Assessment Centre (NFAC)- IT(TP)A No.397/Bang/2021- AY 2016-17 2. Unisys India Private Ltd vs The DCIT Circle 7(1)(1)- M.P. No. 29/Bang/2022 in ITA No. 584/Bang/2019- AY 2012-13 3. Infor (India) Private Limited vs DCIT CIrcle 2(1), Hyd - ITA-TP. No. 198/Hyd/2021- AY 2016-17- 4. COWI India Pvt. Ltd. vs Income Tax officer, E-Assessment Centre, Circle-I, Gurgaon- ITA No. 443/Del/2021- AY 2016-17 High-end KPO service uncomparable- 1. Rampgreen Solutions private Limited Vs Commissioner of Income tax(ITA 102/2015) 4. The Ld. D.R. stated that on perusal of the annual report by Ld. DRP, he noted that this company is engaged in business process management services to organizations that outsource their business processes. Further, at P.60, under Note 2.25 -Segment Reporting, it is clearly stated that the company's operations primarily relate to providing business process management services, and accordingly revenues represented along with industry classes comprise the primary basis of segmental information. Thus, primary business activity of thi....
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.... the comparables available in a given situation typically determine the most appropriate transfer pricing method. In general, closely comparable products/services are required if the comparable uncontrolled price ('CUP) method is used for arms' length pricing; the resale price, cost-plus methods generally require a lesser degree of products or services comparability and may be appropriate if functional comparables are available. The TANIM requires only broad functional and product/services comparability. In many instances, it will be possible to use 'imperfect' comparables, e.g., comparables from another industry sector, possibly adjusted to eliminate or reduce the differences between them and the controlled transaction." 4.2 Reliance was also placed before Ld. DRP in the case of Pino Bisazza Glass Pvt. Ltd. Vs. ACIT, C5, Ahmedabad 2005-06 & 2007-08, ITA No.1690 & 1622/Ahd/2010 & 3201/Ahd/2011 wherein acceptance of broad comparables was upheld. The relevant extract has been reproduced below: "- 12 - Although the selection of "Industry Segment" is the start point but it is a broad selection, particularly if a finer or more close selection is available. We....
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....s 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 packaged foods, logistics and life services. Further in the annual report it has been mentioned that this comparable provides services that are different from routine back-office services. This noting itself makes this comparable not functionally similar with that of assessee. Accordingly we direct this comparable to be excluded from finalist." 5.1 In view of the above order of the Tribunal, we are inclined to direct the AO/TPO to exclude Infosys BPO Ltd. from the list of comparables to determine the ALP. (b) Eclerx Services Ltd. ('Eclerx") Functionally different 6. The company provides a wide range of activities including financial services (contract risk review, consulting services etc.), digital marketing (web analytics, CRM and business intelligence etc.), digital branding (content creation, digital asset management etc.) ....
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....s Ltd. (Eclerx) as a good comparable in the list of final set of comparables. The assessee argued that the same is a KPO company and hence, it is not a good comparable. 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 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. 7.1 Further, this company operates under a single primary segment i.e., data analytics and process outsourcing services and neither the assessee nor the TPO has gone into the verticals/ horizontals and high end or low-end distinction of the comparable companies. Finally, under TNMM only broad comparability is required. Further, the profit margins of various comparables will be averaged and a variation of 3% is also permitted. These aspects take care of some differences....
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....unal, we direct the AO/TPO to exclude this company from the list of comparables. (c) SPI Technologies India Pvt. Ltd. Functionally dissimilar 9. As per the annual report of the company, the company is engaged in typesetting business, including transformation of unedited manuscripts into final print-ready files, supply of structured data for electronic publishing and providing end-to-end project management services. These services are not comparable to the services rendered by the Assessee. 9.1 Further, the learned TPO in the order has rejected MPS Limited which is engaged in "the business of providing publishing solutions viz., type setting and data digitization services for overseas publishers and supports international publishers through every stage of the author-to-reader publishing process and provides a digital-first strategy for publishers across content production, enhancement and transformation, delivery and customer support. " MPS Limited has been rejected basis functional incomparability. KPO service company basis response received u/s 133(6) 9.2 Basis the response received u/s 133(6) of the Act from SPI Technologies, the company has claimed that it is "....
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....sion of diversi f ied KPO services and hence cannot he considered as ITES comparable. 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 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. 10.2 As discussed by the TPO, the company in response to the notice u/s 133. (6) of the Act, has stated that the company and Lambda tent Pvt 1,1d had entered into a scheme of amalgamation with effect from 1 September 2017. This amalgamation also does not pertain to this year and do not have any impact on the profits of the company. 10.3 The company is engaged in providing, only data processing services and hence the margin is completely at the entity level. On page 163 of the Annual report, the company has, disclosed that the entire revenue is fr....
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.... Judicial precedents relied upon: Segmental data to be considered for filters 1. CGI Information Systems and Management Consultants Private Limited [IT(TP)A No. 586/Bang/2015 and 183/Bang/2017] In view of above, the Ld. A.R. contended that the above companies are comparable to the Assessee and should be included in the list of comparable companies. 14. The Ld. D.R. submitted that on perusal of the annual report, it was seen from disclosure in Profit and Loss account and Annual Report for the A.Y. 2015-16 that earnings in foreign exchange is Rs. 0.46 crore whereas the total revenue from operations is Rs. 8.33 crore. Therefore, it has an export revenue of 0.55% of total revenue from operations. Hence it is rightly rejected as comparable as it is not satisfying the export revenue filter adopted by the TPO. Therefore, this company is not functionally comparable as it fails the export revenue filter of 75% adopted by the TPO. As a result, this objection is to be dismissed. 15. We have heard the rival submissions and perused the materials available on record. The contention of the Ld. A.R. is that when segmental information is available and not disputed, it ....
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....the comparability of this company is being remanded to be TPO for consideration of adjustments as mentioned above, the objection with regarded to functional comparability should also be looked into by the TPO in the remand proceedings on the basis of materials which he may gather u/s.133(6) of the Act. The Assessee should be given opportunity of being heard by the TPO before the issue is decided by the TPO. 15.1 In view of the above order of Tribunal, taking a consistent view, we direct the AO/TPO to include BNR Udyog Ltd. In the list of comparables to determine the ALP of international transactions. 16. Ground No.6.3(c) assessee wants inclusion of following comparables:- 1) Informed Technologies India Ltd. 2) Sundaraam Business Services Ltd. 3) ACE Software Exports Ltd. 4) Hartron Communications Ltd. 16.1 The Ld. A.R. submitted that the DRP's direction to reject the below mentioned companies in the final list of comparables is incorrect in law and on facts for the following reasons: (a). Hartron Communications Limited Functionally comparable 16.2 The company is engaged in 3 business segments namely, Rent Income, Office back-up ....
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....ited Functionally comparable 18. The company is primarily engaged in the business of Business processing outsourcing which is the only reportable segment of the company The company passes quantitative and qualitative filters applied by the Assessee and the learned TPO and, is therefore comparable to the Assessee. 19. We have heard the rival submissions and perused the record. In our opinion, th TPO/AO is required to consider these comparables afresh and decide. Accordingly, these comparables are remitted to AO/TPO for fresh consideration. FINAL SET OF COMPARABLES 20. On acceptance of the afore-mentioned submissions, the final list of comparables would be as follows: a) Bhilwara Infotechnology Limited b) One touch Solutions India Private Limited c) Tech Mahindra Business Services Ltd. d) Hartron Communications Limited e) Ace Software Exports Ltd f) Sundaram Business Services Limited g) Informed Technologies India Limited h) B N R Udyog Ltd 20.1 Since the Assessee's margin would be within the arm's length range of margins of the remaining comparables, the international transaction of provisio....
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....rest on receivables on actual outstanding period; 7.6 Without prejudice to our ground 7.2 above, the learned TPO/ AO/ DRP have erred, in law and in facts, by adopting SBI interest rates on short term deposits for FY 2015-16, for computing notional interest on the outstanding trade receivables; 7.8 Without prejudice to our ground 7.2 above, the learned TPO/ AO/ DRP have erred in not adopting LIBOR as the basis for benchmarking. 21.1 The Ld. A.R. submitted that the assessee wishes to submit that the delayed / outstanding receivables should not be considered as a separate international transaction. Further, it is humbly submitted that determination of ALP in respect of delayed receivables from inter-company transactions is not required since ALP of intercompany transactions of provision of services has been already determined and no separate adjustment is necessary in this regard. Outstanding receivables cannot be treated as a separate international transaction 21.2 The assessee has provided IT enabled services to its AEs and amount outstanding as trade receivables merely represent the dues which are to be received by the Assessee against the services provid....
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.... receivables with the main international transaction of provision of services due to the fact that receivables are a result of the international transactions of the Assessee. Incorrect adoption of SBI short term deposit rates instead of LIBOR rates for imputing notional interest 21.7 Without prejudice to our contention that outstanding receivables is not an international transaction, we would like to submit that the outstanding balances being in foreign currency and receivable from foreign debtors, the appropriate rate for imputing notional interest on delayed receivables would be LIBOR. The Hon'ble DRP has erred in directing the ld. TPO to use SBI short-term deposit rates. Incorrect computation of notional Interest on delayed receivables 21.8 Without prejudice to our contention that outstanding receivables is not an international transaction, we wish to submit that the notional interest is imputed considering a credit period of 30 days in spite of our submission that as per the inter-company agreement, the credit period allowed by the Assessee is 60 days. 21.9 As per the Hon'ble DRP's directions, the notional interest computation must be made on an Invoice-by-Invoic....
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....stment in comparable prices. It was held by the Tribunal that in case after giving necessary adjustment, the international transaction of the assessee is found to be at arm's length, then there is no question of separate adjustment on account of allowing credit period from receivables from AE. The relevant finding of the Tribunal in assessee's own case for assessment year 2008-2009 reads as follows:- "23. We have heard the learned Counsel for the assessee as well as learned Departmental Representative and considered the relevant material on record. At the outset we note that this issue has been considered and decided by this Tribunal in a series of decisions including the decision in the case of M/s. Dell International Services India Pvt. Ltd. Vs. JCIT in ITA No.308/Bang/2015 Dt.17.6.21)16 wherein the Tribunal has considered this issue in para 7 as under : " 7. We have considered the rival submissions and relevant material on record. At the outset, we note that allowing a credit period on receivable from AE is not an independent international transaction however, it is part of the main international transaction of providing software development services by....
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....e TPO has made the adjustment on account of notional interest for the excess period allowed by the assessee to AE for realization of dues. The TPO applied 18.816% per annum as arm's length on the over due amounts of AE and proposed adjustment of Rs. 2,49,95,139/, The DRP though concurred with the view of the Assessing Officer/TPO on the issue of international transaction, however, the adjustment was reduced by applying the interest rate of 7% instead of 18.816% applied by the TPO. The first issue raised by the assessee is whether the aggregate period extended by the assessee to the AE which is more than the average credit period extended to the nonAE would constitute international transaction. We are of the view that after the insertion of explanation to section 92B(1), the payment or deferred payment or receivable or any debt arising during the course of business fall under the expression international transaction as per explanation. Therefore, in view of the expanded meaning of the international transaction as contemplated under clause (1) (e) of explanation to section 92B(1), the delay in realization of dues from the AE in comparison to non-AE would certainly falls in the am....
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....he transaction of sale to the AE and credit period allowed in realization of sale proceeds are closely linked as they are inter linked and the terms and conditions of sale as well as the price are determined based on the totality of the transaction and not on individual and separate transaction. The approach of the TPO and DRP in analyzing the credit period allowed by the assessee to the AE without considering the main international transaction being sale to the AE will give distorted result by disregarding the price charged by the assessee from AE. Though extra period allowed for realization of sale proceeds from the AE is an international transaction, however, for the purpose of determining the ALP, the same has to be clubbed or aggregated with the sale transactions with the AE. Even by considering it as an independent transaction the same has to be compared with the internal CUP available in the shape of the credit allowed by the assessee to non AE. When the assessee is not making any difference for not charging the interest from AE as well as non AE then the only difference between the two can be considered is the average period allowed along with outstanding amount. If the ave....
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....iate adjustments need to be considered to bring parity in the working capital investment of the assessee and the comparables rather than looking at the receivable independently. Such working capital adjustment takes into account the impact of outstanding receivables on the profitability. In this regard, the reliance is placed on the following rulings wherein the need to undertake working capital adjustment has been appreciated by the Hon 'ble Tribunals : * Mercer Consulting India Pvt. Ltd. [TS-170-ITAT-2014(DEL)J, * Mentor Graphics (Noida) Private Limited [109 ITD 1011 * Egain communication (P) Ltd. [ITA No. 1685/PN/2007J * Sony India (Pvt.) ltd. [2011-T7I-43-ITAT-DEL-TPJ * Capgemini India Private Limited [TS-45-ITAT-2013(Mum)-TP] 8. In view of the above, a working adjustment appropriately takes into account the outstanding receivable. Therefore, the assessee has undertaken a working capital adjustment to reflect these differences by adjusting for differences in working capital and thereby, profitability of each comparable company. Accordingly, while calculating the working capital adjusted, operating margin on costs of the ....