TaxTMI 
TaxTMI 
2023 (8) TMI 211
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....section 92CA of the Income-tax Act, 1961 ("the Act"). 2. The learned AO/ learned TPO/ Hon'ble DRP erred in rejecting the Transfer Pricing ("TP") documentation maintained by the Appellant by invoking provisions of sub-section (3) of section 92C of the Act 3. The learned AO/ learned TPO/ Hon'ble DRP erred in rejecting the economic and comparability analysis undertaken in the TP documentation and in conducting a fresh comparability analysis by introducing various filters for the purpose of determining the Arm's Length Price ('ALP') of the international transaction thereby following a non-transparent approach. Segmental Computation 4. The learned AO/ learned TPO/ Hon'ble DRP has erred in laws and on facts in computing the operating segmental margin of the Appellant by re- allocating the employee cost within the EDS segment on the basis of revenue. The Appellant submits that it has allocated/ apportioned the cost appropriately and hence, the segmental margin as computed in the documentation report is correct and ought to be accepted. Conceptual grounds and filters 5. The learned AO/ learned TPO/ Hon'ble DRP erred in applying certain filters whil....
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....s Pvt. Ltd. d) Inteq BPO Services Pvt. Ltd. e) SPI Technologies India Pvt. Ltd. f) Vitae International Accounting Services Pvt. Ltd. g) Infosys BPO Ltd. h) CES Ltd. 16. The learned AO/ learned TPO/Hon'ble DRP has erred in computing the margin of the following companies: a) Sundaram Business Services Ltd. b) Vitae International Accounting Services Pvt. Ltd. c) Manipal Digital Systems Pvt. Ltd. 17. The learned AO/ learned TPO/ Hon'ble DRP has grossly erred in not accepting the following companies as comparables: a) BNRUdyogLtd. b) R Systems International Ltd. c) Allsec Technologies Ltd. d) Cosmic Global Ltd. e) Digicall Teleservices Pvt. Ltd. f) Bhilwara Infotechnology Ltd, g) iSN Global Solutions Pvt. Ltd. h) I Service India Pvt. Ltd. Interest on Outstanding Receivables 18. The learned TPO/ learned AO/ Hon'ble DRP has grossly erred in law and facts by considering it as a separate international transaction. 19. The learned TPO/ learned AO/ Hon'ble DRP has erred in considering the balances as "unsecured loan" advanced to the AEs, thereby charging notional interest amounting to INR 2,57,15,341 as per SBI short term deposit rate.....
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.... Brief facts of the case are that the assessee has filed its return of income on 30.11.2017 declaring total loss of Rs. 11,89,93,421/-. Subsequently, on 30.3.2018, the return was revised declaring the very loss and the book profit u/s 115JB of the Income-tax Act,1961 ['the Act' for short] was declared at Rs. 77,76,68,972/-. The return was processed u/s 143(1) of the Act and the case was selected under CASS for scrutiny and statutory notices were issued to the assessee. The assessee filed documents and from those documents, the AO observed that the case should be referred to the TPO as per the CBDT instruction No.3/2016 dated 10.3.2016. Therefore, the case was referred to the TPO after obtaining approval from the competent authority. 5.1 The Quest Global Engineering Services Pvt. Ltd. ("QGESPL") is incorporated as a Private Limited company on 5.9.2014 under the Companies Act, 2013 and is engaged in rendering Engineering services, software development and maintenance services to leading multinational operations. The company is a subsidiary of the Quest Global Mauritius Holding Ltd., a company raised under the law of Mauritius. The company has 10 locations/units out of which ....
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....als were drawn by the TPO:- 5.5. The assessee has submitted documents vide letter dated 19.2.2020, from the TP documents 11 comparables companies were selected for ITeS & Engineering Design Services(EDS) segments and applied TNMM method as a most appropriate method. The taxpayer selected comparables engaged in the very same industry vertical as the taxpayer. On 6th Jan, 2021 a show cause notice was issued to the assessee in respect of the ITeS & EDS segment. In the show cause notice, the TPO remarked on the filter applied by the assessee, defects pointed out, search process adopted by the TPO, the accept/reject matrix of companies considered by the TPO. The tax payer was informed about the rejection of the TP study reports and list of comparables selected by the TPOs. The assessee filed objections which were dealt by the TPO. 5.6 The ld. TPO applied fresh search process for EDS & ITeS segment and adopted the following filters: a) Use of current year data wherever available b) Companies having different financial years ending 31.3.2017 or data of the company which does not fall within 12 months period, it means from 1.4.2016 to 31.3.2017 were rejected. c) Companies whose inc....
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....er chapter 10, it requires tax payer to carry out FAR analysis with regard to each of the transactions entered into with the AEs. Therefore, it was incumbent upon the tax payer to separately benchmark the arm's length price of the international transaction relating to interest on overdue receivables from the AE, by way of analysis of functions, assets and risks, whereas it was not done by the tax payer in its TP documentation. Accordingly, he did not discharge his burden of proof and substantiated its claim that adjustment towards interest on overdue receivables is not justified. The assessee also failed to demonstrate that the selected comparables had similar overdue receivables and no separate adjustment is required for interest on overdue receivables. After discussing all legal aspects, he separately benchmarked these transactions using CUP as a most appropriate method, he applied CUP method and 6 months LIBOR + 400 basis points, accordingly, he calculated interest rate at 5.975%, the ld. TPO also considered the impact of working capital adjustment and assessee was issued show cause notice on 6.1.2021 and was asked to furnish invoice- wise details of the trade receivables from t....
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....2,57,15,341/-. The assessee did not get any relief on the disallowance made by the AO u/s 14A of the Act. The assessing officer passed the final assessment order on 24.2.2022. Aggrieved from the above order, the assessee filed appeal before this Tribunal. Ground No.4 6. The ld. A.R. in ground no.4 submitted that the lower authorities have wrongly calculated the segmental profit. The assessee has been earning 15% profit on the services rendered to the overseas AE under the EDS and BSS segment, which is as per the Agreement entered with the AEs. Under the EDS segment, the following types of services were provided to its AEs: a) Services rendered to overseas AE b) Services rendered to domestic AE c) Services rendered to third parties (non-AEs) 6.1 The assessee also renders business support services to its overseas AEs as ITeS. In the TP study report, the assessee calculated profits after allocating the costs as per the guidelines incorporated by the assessee for rendering the particular services. However, the ld. TPO has made an error in calculating the segmentwise margins. He calculated 8.68% margin for ECS segment and 8.75% for BSS segment, whereas the correct margin is 15.....
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....e produced segmentwise allocation of expenses, which was produced. He also relied on the self-computation of allocation of expenses. 6.5 The ld. D.R. relied on the order of the lower authorities. He further submitted that the ld. DRP has rightly given the direction for distribution of expenses. The AR of the assessee is unable to point out any mistake on the DRP direction. He further submitted that it was the duty of the assessee to maintain the documents segment wise for correct calculation of segmental profit. Findings:- 7. On perusal of the documents, it has been observed that the assessee has two segments first is ECS and second is BSS. During the year under consideration under the ECS segment, there was a transaction with third party and AE's transaction and BSS transactions were with Associated Enterprises and there is also corporate expenditure. The total operating revenue during the year was Rs. 72,112/- lakhs. In objection filed before the ld. DRP, the assessee has considered that there is an employee cost expenditure of Rs. 55,35,72,612/- which includes under the head "other expenses". The ld. DRP gave direction to the TPO as under: "Keeping in view of this submissio....
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..... 15 AND 17 - EXCLUSION / INCLUSION OF COMPANIES IN ITES SEGMENT These 4 grounds are dealt together hereunder: 7.1 AS PER TP STUDY: During the FY 2016-17, the Appellant has received Rs. 74,07,50,417/- for rendering back-office support services (BSS or ITES) to its AE in Singapore i.e., Quest Global Services Pte Limited. 7.2 The back-office support services are primarily provided in the following areas: Human Resources services (includes talent acquisition team, training and development, University Relationship Development teams); * Finance / Accounts / Taxation services; Services relating to Management Information Systems; * Procurement / Purchase; Quality control; * Treasury services; * Global delivery operations; Information security services; Legal services; * Business excellence; Admin services including Facilities and Training management services; * Operational services; Other ancillary services. 7.3 The functions, risk and assets ("FAR") analysis is provided in pages 1423 to 1428 of paper book. The Appellant therefore classified itself as contract service provider assuming lower than normal risk associated with the provision of back office support services.....
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.... BPM Services Ltd 24.37% 8 Vitae International Accounting Services Pvt Ltd. 27.13% 9 Manipal Digital Systems Pvt Ltd. 27.41% 10 CES Ltd, 29.00% 11 Ultramarine & Pigment Ltd. (seg) 34.41% S No. Company Name Average of 3 years (OP/OC) 12 SPI Technologies India Pvt Ltd. 36.95% 13 Inteq BPO Services Pvt Ltd. 39.51% 35th Percentile 22.37% Median 24.37% 65th Percentile 27.41% * the comparables at Sl.No.1, 2 and 5 are TP study comparables accepted by the TP Officer 7.7 The TP Officer did not grant any adjustment towards working capital. "The TP Officer however re-computed the profit margin of the Appellant at 8.75% against the margin of 15.01% determined by the Appellant in the TP study. 7.8 The issue pertaining to re-computation of margins is discussed in detail under submissions for Ground No.4 (supra). 7.9 A summary of the international transaction, margin computed, and ALP determined is provided in the table below Particulars As per TP Officer Total Operating Revenue (Rs) 76,48,00,000 Total Operating Expenses (Rs) 70,32,00,000 Operating Profit (Rs) 6,16,00,000 OP/ OC (percent) 8.75 Median (percent)....
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....7.41% 11 CES Ltd. 29.00% Ultramarine & Pigment Ltd. (seg) Excluded 12 SPI Technologies India Pvt Ltd. 36.95% 13 Inteq BPO Services Pvt Ltd. 39.51% 35th Percentile 17.53% Median 22.64% 65th Percentile 27.13% 7.14 The TP Officer after giving effect to the directions of DRP computed the adjustment as under: Particulars As per TP Officer Total Operating Revenue (Rs) 76,48,00,000 Total Operating Expenses (Rs) 80,67,00,000 Operating Profit (Rs) (-)4, 19, 00,000OP/ OC (percent) (-)5.19 Median (percent) 17.53 Arm's length price 98,93,36,88 TP adjustment (Rs) 22,45,36,88 TP adjustment as per TP Order 10,97,69,84 Enhancement pursuant to DRP 11,47,67,04 7.15 SUBMISSIONS OF THE APPELLANT: The Appellant has filed a CHART as Annexure-2 containing the arguments against the comparables sought to be excluded. The Appellant submitted that the following companies fail the turnover filter of Rs. l cr. to Rs. 200 cr. and hence they deserve to be excluded from the final set: S No. Company Name Rs/Cr Turnover of the Appellant 76.48 1 Tech Mahindra Business Services 707.60 2 Infosys BPM S....
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.... of this Tribunal in the case of BORQS Software Solutions Pvt. Ltd. (IT (TP)A No.310/Bang/2021 and in the case of ANSR Global Corporation Pvt. Ltd. (IT (TP)A No.225/Bang/2021 and the relevant part of the judgement in IT(TP)A No.310/Bang/2021 is as under: "11. As far as comparability of companies listed as (a) to (g) in Grd.No.8.7 raised by the Assessee is concerned, the admitted factual position is that the turnover of these companies is more than Rs. 200 Crores and the Assessee's turnover is only Rs. 24,71,71,242/-. The TPO excluded from the list of comparable companies chosen by the Assessee in its TP study companies whose turnover was less than Rs. 1 Crore. The contention of the Assessee before the DRP was that while the TPO excluded companies with low turnover, he failed to apply the same yardstick to exclude companies with high turnover compared to the Assessee. The reason for excluding companies with low turnover was that such companies do not reflect the industry trend as their low cost to sales ratio made their results less reliable. The contention of the Assessee was that there would be effect on profitability wherever there is high or low turnover and therefore companie....
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.... and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which .ire (sic) making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which arc loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun & Bradstreet & Bradstree....
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....sdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt.Ltd. Tax Appeal No.18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee. 17.8. In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced....
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.... allow the ground raised by the assessee on this issue and the TPO is directed to exclude the company Tech Mahindra Business Services Ltd., Infosys Business Services Ltd. and SPI Technologies India Pvt. Ltd. from the final set of comparables. In the result, the ground raised by the assessee on this issue is allowed. Ground No.13 Working Capital Adjustment: 10. The assessee has raised this ground for not granting providing working capital adjustment while calculating the adjustment by the ld. TPO. In this regard, the ld. AR submitted that the working capital adjustment must be granted to the assessee and he relied on the following judgements: 1) Huawei Technologies India (P) Ltd. (2019) 101 taxmann.com 313 (Bang) 2) Altimetrix India Pvt. Ltd. (IT(TP)A No.477/Bang/2021. 11. The ld. D.R. relied on the order of the lower authorities and he submitted that during the course of TP proceedings, the assessee was not able to demonstrate that working capital differences had impacted its profits. The working capital adjustment sought by the assessee is calculated between the tested party and the comparable companies. However, such differences in working capital levers cannot be measured....
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.... capital adjustment is to be given and it is a mandatory requirement to allow adjustment if the assessee is able to provide the reasonable/accurate data of the comparable companies and in support of our decisions, we rely on the judgements cited by the ld. A.R. in the case of Huawei Technologies India (P) Ltd. cited supra in which it has been held as under:- 13. In Paragraphs 13 to 16 of the aforesaid OECD guidelines, need for working capital adjustment has been explained as follows: "13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the price of the goods should equate to the price for immediate payment plus 60 days of interest on the immediate payment price. By carrying high accounts receivable a company is allowing its customers a relatively long period to pay their accounts. It would need to borrow money to fund the credit terms and/or suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element to reflect these payment terms and compensate for the timing effect. 14. The opposite....
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....eliability of the comparables. 15. In the present case the TPO allowed working capital adjustment accepting the calculation given by the Assessee. The CIT (A) in exercise of his powers of enhancement held that no adjustment should be made to the profit margins on account of working capital differences between the tested party and the comparable companies for the following reasons: (i) The daily working capital levels of the tested party and the comparables was the only reliable basis of determining adjustment to be made on account of working capital because that would be on the basis of working capital deployed throughout the year. (ii) Segmental working capital is not disclosed in the annual reports of companies engaged in different segments and therefore proper comparison cannot be made. (iii) Disclose in the balance sheet does not contain break up of trade and non-trade debtors and creditors and therefore working capital adjustment done without such break up would result in computation being skewed. (iv) Cost of capital would be different for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, es....
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....l requirements data. There is also no merit in the objection of the CIT (A) regarding absence of segmental details available of working capital requirements of comparable companies chosen and absence of details of trade and non-trade debtors of comparable companies as these details are beyond the power of the Assessee to obtain, unless these details are available in public domain. Regarding absence of cost of working capital funds, the OECD guidelines clearly advocates adopting rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. Therefore this objection of the CIT (A) is also not sustainable. 17. In the light of the above discussion we are of the view that the CIT (A) was not justified in denying adjustment on account of working capital adjustment. Since, the CIT (A) has not found any error in the TPO's working of working capital adjustment, the working capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working has been given by the Assessee and a copy of the same is at pages 173 & 192 of the Assessee's paper book. No defect whatsoever has been ....
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....ng exclusion and inclusion of remaining comparables in Ground No. 15 and 17 become academic. The Appellant however prayed that liberty may be reserved to contest the same at appropriate time. Considering the above, we grant liberty to the assessee to contest the remaining comparables in at appropriate circumstances. Accordingly, the ground Nos. 15 & 17 became academic in nature and it do not require for adjudication. Ground Nos.18 & 19: 13. The ld. A.R. relied on the written submissions 13.1 AS PER TP OFFICER (para 27page 70-83 of TP Order): The TP Officer treated the trade receivables as an international transaction and adopted notional interest rate of 14% being SBI PLR rate, without providing the method of computation of such rate to the Appellant (page 98 of TP order). The TP Officer therefore made adjustment of Rs. 5,55,90,126/-. 13.2 AS PER DRP (page 31-38 of DRP directions): The DRP had directed the TP Officer to adopt the SBI short term deposit interest rate and directed the TP Officer to verify and compute interest on delayed receivables for the relevant financial year. The DRP did not give any show cause notice or opportunity of hearing, before proposing to adopt SB....
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....120 (Del), there should be TP adjustment on this count after making proper TP study by the TPO after considering the period of credit enjoyed by the comparables and also applicable LIBOR rate in the place of AEs for benchmarking the rate i of interest to arrive at the ALP. With these observations, we remit the issue in dispute to the file of AO/TPO to benchmark the interest rate in the light of the decisions cited by Id. DR. Further, we make it clear that the TPO should compute the interest only for the relevant assessment year after going through the relevant agreements entered by the assessee with AEs while computing the ALP." Emphasis supplied 14. The ld. DR. relied on the order of the lower authorities & submitted that all the allegations raised by the AR of the assessee are not tenable in the eyes of law. 15. We have heard the rival submissions and perused the materials available on record. These grounds are with regard to determination of ALP by construing the delayed realization of receivable by the Assessee from its AE as a separate international transaction and determining ALP of such delayed receivables. The facts in this regard are that in the order passed under secti....