TaxTMI 
TaxTMI 
2021 (9) TMI 1502
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....Assistant Commissioner of Income-Tax, Transfer Pricing -2(1)(1)['Ld. TPO'], inter alia, since he has not recorded an opinion that any of the conditions in section 92C(3) of the Act, were satisfied in the instant case. c) The directions issued by the Dispute Resolution Panel ['Hon'ble DRP' or 'Ld. Panel'] and the order passed by the Ld. AO/ Ld. TPO is without jurisdiction, inter alia, in so far as it purports to give effect to an invalid order of the Ld. TPO. d) On the facts and in circumstances of the case and in law, the Ld. TPO erred in and the Hon'ble DRP also erred in upholding / confirming the action of the Ld. TPO in not demonstrating that the motive of the Appellant was to shift profits outside of India by manipulating the prices charged in its international transactions which is a pre - requisite condition to make any adjustment under the provision of Chapter X of the Act. 2 Determination of arm's length price / Erroneous data used by the Ld. TPO a) The Ld. TPO erred in rejecting the value of international transactions relating to Information Technology Enabled Services ('ITeS Services') a....
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....aw and in facts, by rejecting certain comparable companies identified by the Appellant using employee cost greater than 25% of the total revenues. d) The Ld. AO, Ld. TPO and the Ld. Panel have erred, in law and in facts, by rejecting certain comparable companies identified by the Appellant using export sales less than 75% of the total sales. e) The Ld. AO/ Ld. TPO, while applying the turnover filter at the lower limit so as to reject companies having turnovers less than Rs.l crore in financial year 2011-12, erred in not applying the said filter at the upper end so as to reject high turnover companies as well. The Ld. Panel also erred in confirming the same. f) The Ld. AO/Ld.TPO erred in excluding Ace BPO Services Private Limited as a comparable, despite the said company being functionally comparable to the Appellant. g) The Ld. AO/Ld.TPO have erred, in law and in facts, by undertaking a negative working capital adjustment without appreciating the fact that the company does not bear any working capital risks with respect to transactions with the Associated Enterprises. The Ld. Panel also erred in confirming the same. 4 Non-allowance of ap....
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....tween assessee and its associated enterprise. 2.4 On receipt of reference under section 92CA of the Act, the Ld. TPO called upon assessee to file economic details of the international transactions entered between assessee and its associated enterprises in Form 3 CEB. The Ld.TPO on perusal of various information/details filed observed that, assessee had its following international transaction with its associated enterprise: 2.5 The Ld.TPO accepted international transaction in respect of import of hardware and software products, marketing support services and reimbursement of expenses to AE. The only transaction that was disputed was in respect of provision of back-office support services/income received from ITES segment is. 2.6 The Ld.TPO observed that assessee used OP/OC as PLI to compute its margin at 16%. It used following 11 comparables with an average margin of 17.35% and by using TNMM as most appropriate method and held the transaction to be at arms length. 2.7 Dissatisfied with the comparables selected by assessee, assessee used fresh filters and finalised set of following 10 comparables with average margin of 28.11%: 2.8 After making negative workin....
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.... confirmed orders from end Customers. Kronos US in turn outsources the order to Kronos Mexico (contract manufacturing entity of Kronos Group) which provides the products requested by Kronos Systems to Kronos US, who in turn delivers the product to Kronos Systems for distribution in India. Sourcing & Scheduling (v) Kronos Systems is responsible for managing the procurement schedule with respect to the sale of Kronos products in India and plan the product orders in order to meet the customer delivery requirements. Kronos Systems places purchase order with Kronos US and communicates regarding the requirement of products. Kronos US is responsible for providing the required quantity to Kronos Systems, subject to availability of products demanded. Move Functions (vi). Kronos Systems places an order with Krcnos US for delivery of products only after obtaining 'confirmed orders from end customers. Hence, Kronos Systems does not hold any inventory of Kronos products. Once an order has been placed with Kronos US, Kçonos Systems tracks order fulfilment including handling customer queries on the status of orders. Logistics (vii). Kronos Systems imports Kronos....
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....he above functions, assessee assumes risks pertaining to Market, credit and collection, Foreign exchange risk and scheduling risk. Ground No.3(g) 3. The assessee seeks exclusion of Universal Print Systems Ltd., Infosys BPO Ltd., TCS e-serve Ltd., BNR Udyog Ltd. and Excel info ways Ltd. 3.1 It was submitted by the Ld.Counsel that, these comparables are functionally not similar with that of assessee. 3.2 On the contrary the Ld.Sr.DR placed reliance on observations passed by authorities below. 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. 3.3 We note that under identical circumstances coordinate bench of this Tribunal by order dated 20/09/2019 in case of VWR Labs Products Pvt. Ltd. vs ACIT reported in [2020] 116 taxmann.com 244 observed and held as under: 7. (a) Universal Print Systems Ltd (segmental) (BPO) Assessee sought to ex....
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....s company as a comparable company, the Assessee vide its letter dated 22.12.2015 had pointed out its objections to including this company as a comparable company. A copy of the said objection is at page-785 of the Assessee's paper book. The Assessee pointed out that the OP TC of this company as worked out by the TPO at 59.40% was wrong and unallocated costs as per the annual report should be allocated to BPO segment and if that is done then the OP TC of this company will be only 51.80%. The Assessee further pointed out (Page 764 of paper book) that the TPO had applied revenue filter of more than 75% being from non-financial 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 pe....
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....has to be applied at the entity level and not at the segmental level. The learned DR submitted that if the service revenue filter is applied at the segmental level there can be no objection by the Assessee. She relied on the order of the DRP/TPQ. 50. The requirements of Rule 10B(1)(2) & (3) of the Rules in the matter of comparability of companies under TNMM needs to be seen. The same reads as follows: "10B. (1) For the purposes, of sub-section (2) of section 92C, the arm's length price in relation to an international 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-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....
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.... (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences." 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 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 su....
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.... records placed before us. Assessee placed reliance upon decision of this Tribunal in case of Zyme Solutions (P.) Ltd. v. Asstt. CIT [2019] 108 taxmann.com 495 (Bang. - Trib.), wherein this comparable has been excluded by observing as under: '5. We have heard the rival submissions on the comparability of Infosys BPO as a comparable company. The Delhi ITAT in the case of Baxter India Pvt. Ltd. v. ACIT ITA No.6158/Del/2016 for AY 2012-13 in the case of a company rendering ITES such as the Assessee, vide order dated 24.8.2017 Paragraph 23 held that Infosys BPO is not comparable with a company rendering ITES for the following reasons:- "23. In so far as exclusion of Infosys BPO Ltd. is concerned, we find from the submissions made by the assessee before the Assessing Officer/TPO/DRP is that Infosys BPO Ltd. is predominantly into areas like Insurance, Banking, Financial Services, Manufacturing and Telecom which are in the niche areas, unlike the assessee. Further it was also submitted that the Infosys BPQ Ltd. comprises brand value which will tend to influence its business operation and the pricing policy thereby directly impacting the margins earned by the Infosys ....
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....n the contrary opposed its exclusion and placed reliance upon orders passed by authorities below. We have perused submissions advanced by both sides in light of records placed before us. Assessee placed reliance upon following decisions in support of its argument for exclusion of this comparable: ♦ Zyme Solutions (P.) Ltd. (supra) ♦ Baxter India (P.) Ltd v. ACIT [2017] 85 taxmann.com 285 (Delhi - Trib) ♦ Pr. CIT v. BC Management Services (P.) Ltd. [2018] 89 taxmann.com 68/(Delhi) It is observed that this comparable has been excluded by this Tribunal. Assessee placed reliance upon decision of this Tribunal in case of Zyme Solutions (P.) Ltd. (supra), by observing as under: "11.3 We have heard rival submissions and perused material on record. The issue of comparability of this company was considered by the coordinate bench of Tribunal in the case of XL Health Corpn. India (P.) Ltd. (supra). The relevant findings of the Tribunal are as under: '. . . . We have heard the rival submissions and perused the material on record. From the perusal of the Annual Report of this entity placed at page Nos....
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....wever contended that this company is compared only for segment of medical transcription and therefore should not be excluded. She placed reliance upon decision of this Tribunal in case of Mobily Infotech India (P) Ltd. v. Dy. CIT [2018] 97 taxman.com 2 (Bang. - Trib.) in support. We have perused submissions advanced by both sides in the light of the records placed before us. Assessee is challenging functional dissimilarity of this company with that of assessee as it is into medical transcription. We have our reservation to consider medical transcription services to be one of KPO services. In our considered opinion medical transcription services is basically back-office services provided by graduates who are trained for short period of 6 months to one year. These are short crash courses undertaken by graduates who are trained to understand and speak English. There is no value addition in the services rendered by people in medical transcription. To our understanding, basically these people who carry out medical transcription services are trained to understand language spoken by doctors, outside India to whom medical reports of patience are sent for expert opinion. M....
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....assessee as per law. 3.4 Nothing has been placed before us by the Ld.Sr.DR contrary to the above observations by coordinate bench of this Tribunal. Further it is observed that this Tribunal considered the above comparables in case of a captive service provider like the assessee before us. Respectfully following the same we direct exclusion of Universal Print, TCS e-serve and Infosys BPO from the list of comparables and remand BNR Udyog Ld. AO/TPO to consider it afresh in light of the observations made by coordinate bench of this Tribunal reproduced hereinabove. 4. In Ground No.3(g) assessee is aggrieved by negative working capital computed by the Ld.TPO, without appreciating the fact that assessee is a captive service provider. The grievance of the assessee is with regard to negative working capital adjustment computed by the Ld.TPO and confirmed by the DRP. It was submitted that Working capital adjustment is made for the time value of money lost when credit time is given to the customers. The Assessee however does not bear any risk and has no working capital contingencies. The Assessee has not incurred any expenses for meeting the working capital requirement. The Assessee....