TaxTMI 
TaxTMI 
2023 (7) TMI 897
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....pellant, is bad in law, contrary to the facts and circumstances of the case and is liable to be quashed. Transfer Pricing (TP) Grounds 2. On the facts and in circumstances of the case and in law, the Hon'ble Dispute Resolution Panel -2, Bengaluru (`Hon'ble Panel' or `DRP') erred in not appreciating that the order of the learned Deputy Commissioner of Income-tax (Transfer Pricing) - 2(2)(2), Bangalore (learned Transfer Pricing Officer' or 'learned TPO') passed under Section 92CA of the Act is contrary to law and thus liable to be quashed. 3. Back Office Support Service segment 3.1. On the facts and in circumstances of the case and in law, the Hon'ble DRP/ learned AO/ TPO erred in making an adjustment of INR 18,792,715 to the transfer price of the Appellant's international transactions in respect of Back office support service segment by way of comparability analysis. 3.2. On the facts and in circumstances of the case and in law, the Hon'ble DRP/ learned AO/ TPO erred in including company Universal Print Systems Limited (`UPS') as a comparable to the Appellant. In doing so, Hon'ble DR / learn....
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....omparable for the reason that, it fails employee cost filter and has insufficient company information. It is also been submitted that, functionally this company is providing integrated print solution to its customers and does not provides routine ITEs services like that of assessee. It has been submitted that this company is not a captive service provider like that of assessee and has products sale as well as services sale, which is evident from page 1360 of paper book volume 1 (Index for Annual Reports). Ld.CIT DR placed reliance upon orders of authorities below and submitted that this comparable is functionally comparable with that of assessee. We have heard submissions advanced by both sides in light of record placed before us. On perusal of annual report of this company placed in paper book, we are of considered opinion that this comparable is basically into sale of products and services unlike a captive service provider such as assessee, who works on cost plus basis, providing services only to its AE's. It is also observed that this comparable is basically providing BPO services from its Prepress units. In written submission filed, assessee placed relianc....
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....harbour rules introduced by the CBDT ITES has been defined as business process outsourcing services provided mainly with the assistance or use of information technology. It was also submitted that this company does not satisfy the definition of ITES as contained in Rule IOTA(e) of the Rules. Since use of information technology is absent .in the various services provided by this company, it cannot be regarded as ITES company. The Assessee also submitted that this company fails the employee cost filter. The employee cost filter requires that the employees cost incurred by the company must be more than 25% of its revenue. 48. The TPO at page-20 of his order has dealt with the above objections by observing as follows: (a) Pre-Press BPO unit provides back office support services. (b) This company has four major segments viz., Repro, Label Printing, Offset Printing and pre-press BPO. The employee cost of pre-press BPO was more than 25% of the revenue from pre-press BPO and therefore the employee cost filter is satisfied in the case of this company. (c) On the service revenue filter viz., the requirement that a comparable company must have revenue....
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....r of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (if) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international 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 realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii): (v) the net profit margin thus established is then taken into account an arm's length price in relation to the international transaction. (2) For the purposes of sub-rule (1), the comparability of an (a) the specific characteristics of the property transferred or services provide: either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions (c) the specific characteristics of the prope....
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....ts supplement the functions performed in the Pre- press BPO segment has to be seen. We therefore set aside the order of the DRP in this regard and remand for fresh consideration by the TPO the comparability of this company. In terms of Rule 10B(3) of the rules the profit margins of Pre-Press BPO have to be adjusted taking into account the fact that two other segments supplement the pre-press BPO segment. If such adjustment cannot be reasonably or accurately made then this company has to be excluded from the list of comparable companies. The TPO for this purpose can use his powers u/s. 133(6) of the Act to get required details from this company. As far as the argument that this company fails functional comparability, we find that none of the objections raised the Assessee in this regard about lack of information about allied services performed by the pre-press BPO segment of this company and the break-up of the revenue from such allied services have been dealt with specifically by the TPO or DRP. Since the comparability of this company is being remanded to be TPO for consideration of adjustments as mentioned above, the objection with regard to functional comparability should also be....
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.... the P&L A/c of the assessee. It is found from the records that the employee cost of Rs. 268.76 (lacs) on a turnover of Rs. 611.96(lacs) works out to 44%. Hence this comparable clears the employee cost filter and there was no infirmity in the action of the AO. The DRP on verification of records also upheld the TPO reducing the mark up cost from 52.46% to 51.80%. 7. Accordingly, the objections of the assessee were rejected by the DRP. Against this, the assessee is in appeal before us. 8. The ld. AR submitted that this issue came up for consideration before the Tribunal in the case of Credit Points Services (P.) Ltd. in ITA No.377/PUN/2017 dated 12.3.2019 wherein it was held as under:- "8. We have perused the case records and heard the rival contentions and have given considerable thought on the records and relevant documents placed before us. From the facts on record and more specifically from the Transfer Pricing Index and report of the assessee, the details of functional structure is provided and after perusal of the orders of the TPO and the Ld. CIT(A), we find that there is no specific findings as to the analysis regarding the functioning of Universal Print System....
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....ore us. It is contended by the assessee that this company fail revenue filter more than 75% from ITES segment and also functionally not comparable with that of the assessee-company and also fails the filter of earnings from export against 75% of the total revenue and also fails the employee cost filter as employee cost is only 18.56% of the sales. (iii) We heard the rival submissions and perused the material on record. We have perused the Annual Report of this company placed at pages 352 to 463 of paper book. From the page no. 354 it is stated as under. "In 2011-12, Your Company faced many challenges ranging from historically steep fuel price increases, non-availability of power throughout the year and high raw material costs. The Labels and Offset divisions in particular were negatively impacted due to non-availability of power. Tamil Nadu on the whole, faced drastic power outages and restrictions, which were mainly directed at industries in order to keep the vote banks happy. The two divisions saw as much as 6 hours of power cuts in a day in addition to two days of ''power holidays" in a week. Although this situation is expected to ease in the c....
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....penses of Rs. 89.67 Lacs which would distort the segmental profits and therefore, the segmental results would not be reliable. Upon perusal, we find that Bangalore Tribunal in the case of XLHealth Corpn. India (P.) Ltd. v. Asstt. CIT [2018] 91 taxmann.com 310 for very same AY 2012-13 directed for exclusion of this entity in case of assessee having similar functional profile on the ground that an entity which is engaged in the business of printing could be, by no structure of imagination, be considered as comparable entity. Secondly, as rightly pointed out by Ld. AR, the segmental results of the said entity would not be reliable in view of the fact that it has unallocated expenditure of Rs. 89.67 Lacs which would surely distort the segmental results. Keeping in view the said factors, we direct for exclusion of this entity." 12. Further, the coordinate Bench of the Tribunal in the case of Software Paradigms Infotech Pvt. Ltd. for AY 2012-13 in ITA No.59/Bang/2023 dated 17.5.2023 held as under:- "14. We have heard the rival submissions and perused the materials available on record. On earlier occasion, the assessee came in appeal before this Tribunal for this asse....
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....ng from nonfinancial service income. The Assessee pointed out that the percentage of income from ITES was only 21.6% of the total revenue from operations of this company as per its annual report. The .Assessee also pointed out that in the Pre-press BPO segment this company was providing integrated print solutions to its customers, which includes scanning, design/layout, trapping, hand-outlined clipping path and image masking and magazine and catalogue publishing. The Assessee submitted that the aforesaid services are not in the nature of ITES. The Assessee pointed out that as per the safe harbour rules introduced by the CBDT ITES has been defined as business process outsourcing services provided mainly with the assistance or use of information technology. It was also submitted that this company does not satisfy the definition of ITES as contained in Rule IOTA(e) of the Rules. Since use of information technology is absent .in the various services provided by this company, it cannot be regarded as ITES company. The Assessee also submitted that this company fails the employee cost filter. The employee cost filter requires that the employees cost incurred by the company must be more th....
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.... the most appropriate method, in the following manner, namely: - (a) to (d). ****** (e) transactional-margin method, by which, (i) the net profit margin realised by the enterprise from an international 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 (if) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international 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 realised by the enterprise and referred to in sub-clause (i) is established to be the same as the ....
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....argued that when the TPO himself applied the filters at the entity level he was not entitled to apply the filters at segmental level. As we have already stated if clear segmental information is available the filters can be applied at the segmental level in TNMM. Therefore the objection with regard to this company failing the employee cost filter and service revenue filter in our view was rightly rejected by the TPO and DRP. It is however seen that this company has four segments viz., Repro. Label Printing, Offset Printing and Pre-press BPO. Whether the label printing and offset printing segments supplement the functions performed in the Pre-press BPO segment has to be seen. We therefore set aside the order of the DRP in this regard and remand for fresh consideration by the TPO the comparability of this company. In terms of Rule 10B(3) of the rules the profit margins of Pre-Press BPO have to be adjusted taking into account the fact that two other segments supplement the pre-press BPO segment. If such adjustment cannot be reasonably or accurately made then this company has to be excluded from the list of comparable companies. The TPO for this purpose can use his powers u/s. 133(6) of....
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....export filter being more than 75%, the filter are to be applied only on the figures of this segment. The total revenue from Pre-press BPO segment is from exports only. Therefore. the export filter is satisfied in the case of this company. On the issue adopting segmental data for applying filter. the Hon'ble ITAT in the case of Zyme Solutions Pvt. Ltd.. vs ACTT reported in (2019) 101 taxman.com 292 itself upheld that if clear segmental information is available the filters can be applied at the segmental level in TNMM. The relevant extracts of the order is reproduced as under: "5.2 There appears to be no bar in the Rules referred to above to considering segmental data under TNMM because the comparison is of "net profit margin realized by the enterprise from an international transaction" with the "net profit realized from a comparable uncontrolled transaction". Therefore comparison is of similar transaction. When segmental information is available and is not disputed. it cannot be argued that filters have to be applied at entity level. it cannot be argued that when the TPO himself applied the filters at the entity level he was not entitled to apply the filters at....
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..../s. Universal Print Systems Ltd. and no reply has been received from them. Having no option, he considered this company as comparable to the assessee company and included in the lists of comparables. In our opinion, the required information u/s 133(6) of the Act is not made available to the TPO, in such circumstances, T.P. adjustment on this count cannot be made reasonable or accurately made in this regard. Accordingly, this company is to be excluded from the list of comparable companies as reliance placed by this Tribunal while deciding this issue in assessee's own case on the decision of Zyme Solutions Pvt. Ltd. Vs. ACIT (2019) 101 Taxmann.com 292. Accordingly, we direct the AO/TPO to exclude this company M/s. Universal Print Systems Ltd. from the list of comparables." 13. In view of the above order, we direct the AO/TPO to exclude Universal Print Systems Ltd. from the list of comparables. This ground is allowed. BNR Udyog Ltd. 14. The Tribunal in the first round of appeal set aside the issue of BNR Udyog Ltd. to the TPO with the following observations:- "We have perused submissions advanced by both sides in the light of the records placed before us. As....
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.... of the co-ordinate Bench in the case of Indegene (P) Ltd. (Supra) which is also rendered on similar facts, we deem it appropriate to remand the matter of the comparability of this company, TCS E-serve Ltd. To the file of the TPO for fresh consideration in the light of out above observations. Needless to add, the TPO shall afford the assessee adequate opportunity of being heard and to file details/submissions in this regard. It is also been observed that similar view has been taken by decision of this Tribunal in case of Nielson Sports India (P.) Ltd. v. ACIT [IT(TP) Appeal No.196(Bang.) of 2017, dated 28-06-2019]. Respectfully following the same, we set aside this comparable back to Ld.TPO for considering it afresh. Needless to say that proper opportunity shall be granted to assessee as per law. Accordingly we set aside this comparable back to Ld.TPO." 15. In the set aside proceedings, the TPO observed as follows:- "7.1 The taxpayer has contended that comparable M/s BNR Udyog Ltd. fails the related party transaction ('RPT') filter. The taxpayer has calculated the RPT/Sales by including purchases, sales and services together in the numerator b....
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....ere advanced for exclusion of this company. Hence this company is held to be comparable with that of the Assessee. 4.6 We found BNR Udyog Ltd., is providing IT enabled services of more than 75% of its revenue and whereas the learned AR could not substantiate with evidence in respect of other filters. Therefore, we are not inclined to interfere with the action of the AOITPO in including the comparable company for transfer pricing adjustment. Accordingly, the ground of objection is therefore rejected." 17. Against this, the assessee is in appeal before us. 18. We have heard both the parties and perused the material on record. The main argument of the ld. counsel is that this company fails RPT filter and also fails the functionality test. Regarding functionality test, this has already been decided by the Mumbai Bench of the Tribunal in the case of GTS e-Services (P.) Ltd. (supra) where it is held as under:- "(iii) BNR Udyog Ltd. Similar arguments of functional dissimilarity have been raised for this entity by drawing our attention to the fact that this entity was engaged in medical transcription, medical coding and medical billing etc. As observed by u....