AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2022 (8) TMI 1428
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....ring the course of assessment proceedings, it was noticed that the assessee had undertaken international transactions with its AEs. Hence, the matter was referred to the Transfer Pricing Officer (TPO) to determine the Arm's Length Price (ALP) of the same. The TPO passed an order u/s 92CA of the I.T.Act dated 30.10.2017, wherein he proposed following transfer pricing adjustments:- (i) ALP adjustment to the ITeS segment of the assessee Rs.6,35,00,891 (ii) Interest chargeable on trade receivables Rs.2,18,95,047 3. Pursuant to the TPO's order, draft assessment order dated 18.12.2017 was passed u/s 143(3) r.w.s. 144C(1) of the I.T.Act. Aggrieved by the draft assessment order, the assessee filed objections before the Dispute Resolution Panel (DRP). The DRP vide its directions dated 05.09.2018 confirmed the TP adjustment proposed by the TPO. Pursuant to the DRP's directions, the impugned final assessment order dated 28.09.2018 was passed making the TP adjustment amounting to Rs.8,53,95,938, as under:- 4. Aggrieved by the final assessment order, the assessee has filed the present appeal before the Tribunal. Grounds 1, 2 and 8 are general in nature and no specific ad....
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....ments applicable to such outstanding receivable (opening as well as during the year) and further erred in computing the outstanding receivables period on weighted average basis. 16. Notwithstanding and without prejudice, that on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred in arbitrarily adopting a notional rate @ 4.3836% for imputing interest, which is excessive and unreasonable." We shall adjudicate the above grounds as under: TP Adjustment relating to ITES segment (Grounds 3, 5 & 6) 5. The comparison of the TP study of the assessee and that of the computation of ALP and the adjustments made by the TPO are as follows:- 6. The learned AR's limited submission before the Tribunal as regards the ITES segment is for exclusion of following three companies from the list of comparables on the ground of turnover filter and functional incompatibility. (i) Infosys BPO Limited (ii) Microland Limited (iii) Crossdomain Solutions Private Limited. 7. The assessee is also seeking inclusion of one company, namely, Jindal Intellicom Private Limited. We shall consider the exclusion and inclusion of the above comp....
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....d that the aforesaid two companies should be removed from the list of comparable companies. The TPO is directed to compute the average Arithmetic Mean profit of the comparable companies chosen by the TPO, after excluding the aforesaid two companies. 11. In view of the above order of the Coordinate Bench of the Tribunal, we direct to exclude this company from the list of comparable companies. Microland Limited (Exclusion) 12. The learned AR has sought for the exclusion of above company. It is submitted that the company is not functionally comparable as it is involved in infrastructure management and IT enabled services. It is stated that under infrastructure management, the company is engaged in provision of services in connection to server management, database management, storage management, archival management, network management, etc. It is claimed by the assessee that the same is different from ITES services rendered by it. The learned AR has also submitted that the company fails service income filter and also placed reliance on the ruling of the Bangalore Tribunal in the case of M/s.Brady Company India (P) Ltd. v. ITO in IT(TP) No.103 and 790/Bang/2019 (A.Y. 2014-2015)....
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....ord any evidence to support their contention that both the aforesaid segments are rendering ITES only. If that were so, there was no reason whatsoever for the company to show Infrastructure Management Services as different and distinct segment from the ITES. 8.4.3 From an appraisal of the details submitted, it is seen that the services rendered by 'Microland' under Infrastructure Management services are Server Management, Database Management, storage management, Archival Management, Network Management, etc., which has been classified as different from the back office processing services rendered by companies like the assessee in the case on hand. In our view, there is no basis for the TPO to contend that the aforesaid services rendered by 'Microland' are ITES, when the company itself has classified these services as different from ITES and characterized the same as a different business segment. In these factual circumstances, we are inclined to concur with the contention of the learned AR that the Infrastructure Management services segment of 'Microland' is different and distinct with ITES as has been classified by the company in its Annual Report for the year under consid....
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....d reliance on the ruling of the Bangalore Tribunal in the case of M/s.Vee Technologies Pvt. Ltd. v. PCIT in ITA No.7/Bang/2022 (A.Y. 2014-15) (order dated 07.03.2022). 17. The learned DR has reiterated the submissions of the authorities below. 18. We have heard rival submissions and perused the material on record. The Bangalore Bench of the Tribunal in the case of M/s.Vee Technologies Private Limited v. PCIT (supra) for assessment year 2014-2015, had excluded the above company from the comparable list on account of functional incompatibility. The relevant finding of the Tribunal reads as follows:- "11. The learned Counsel for the assessee has prayed for exclusion of 3 out of the 5 comparable companies that remain after the order of the DRP viz., Infosys BPO Ltd., Eclerx Services Ltd., and Crossdomain Solutions Pvt. Ltd. As far as the plea for exclusion of the aforesaid companies from the list of comparable companies is concerned, learned Counsel for the assessee has filed before us a copy of the decision of the ITAT, Bengaluru Bench, rendered in the case of EMC Software and Services Pvt. Ltd. Vs. JCIT 115 taxmann.com 293. The aforesaid decision which also relates to ....
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....ions to clients with headcount ranging from 5 to 65,000." "Crossdomain's IT knowledge and domain competence has provided the edge to develop information systems to implement process innovation and continuously increase efficiency and turn- around-time for business critical processes." As can be seen from the above, the business of Cross Domain ranges from high end KPO services, development of product suites and routine low end ITES service. However, there is no bifurcation available for such verticals of services. Therefore the assessee contends that Cross Domain cannot be compared to a routine ITES service provider. 19. We are of the view that in the absence of any reasons given to the contrary either by the TPO or the DRP for regarding this company as a comparable, this company should be excluded from the list of comparables, accepting the plea of the Assessee. We hold accordingly." Also in the case of PCIT v. BNY Mellon International Operations (India) (P.) Ltd. [2018] 93 taxmann.com 363/255 Taxman 397 (Bom) the Hon'ble Bombay High Court has held the comparable Cross Domain Solutions (P.) Ltd. is in the nature of KPO and observed at paras 3 to 8 as under : ....
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....n Solutions Ltd. was engaged in distinct activities such as payroll activity. 'Knowledge Process Outsourcing'(KPO) service, development of products and routine IT services. Thus, it was found not comparable with an entity which was rendering E-learning services, In the present case also the Respondent provides BPO services which is not with KPO services." Further the learned Authorised Representative substantiated his argument with Annual Report of comparable and we consider it proper to direct the TPO to exclude the comparable from the list of comparables for determination of ALP" 12. Respectfully following the aforesaid decision, we direct exclusion of the aforesaid 3 companies from the list of comparable companies." 19. Respectfully following the above order of the ITAT, we direct the TPO to exclude Crossdomain Solutions Pvt. Ltd. from the comparable list. Accordingly, the appeal of the assessee is allowed on this ground. Jindal Intellicom Private Limited (Inclusion) 20. The DRP / TPO have held that the company is not functionally comparable as it is engaged in provision of call centre and therefore engaged in software segment and not in ITES, ....
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....dal' is engaged in software development services and ITES and segmental information is not available is not a factually correct observation; as borne out from the Annual Report of this company. Further, at page 160 of the Annual Report (i.e., page 657 of the paper book), it is seen that the segmental data of domestic and international segments of operation are given; thereby rendering the observations of the TPO is factually incorrect. 12.4.2 As far as the functional comparability of this company, 'Jindal' is concerned, we find that the Co-ordinate Bench of this Tribunal, in the case of CGI Information Systems and Management Consultants Pvt. Ltd., (supra) for Assessment Year 2012-13 has held that this company should be included in the set of comparables for companies rendering ITES and in this regard at para 56 thereof has held as under:- 12.4.3 In respect of the assessee in the case on hand also, the facts are similar to the cited case (supra). It is also seen that this company, 'Jindal' was chosen / accepted by the TPO as comparable to the assessee in the case on hand both in the earlier Assessment Years 2011-12 and 2012-13 and again in the immediately subsequent Assessm....
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....ked out as to how much amount was received beyond the agreed credit period by the assessee from its AE and the same should be considered as a separate international transactions and appropriate interest on that account should be brought to tax in the present case as TP adjustment. The working given by the ld. AR of assessee in this regard is placed on record but this working is only in respect of debtors as on 31.03.2011 but if the debts are already liquidated during the year but the receipt was after expiry of agreed credit period then the amount of such realization during the present year beyond the agreed credit period should also be considered for this purpose. Hence on this issue, we restore the matter back to the file of AO/TPO for fresh decision by examining the agreement between the assessee and its AE in respect of agreed credit period because as per the agreement dated 01.10.2010 copy of which is available on pages 187 to 217 of paper book, only those receivables are covered which are arising after this date but in respect of those receivables which has arisen before 01.10.2010 if any, there must be some other agreement which may contain different credit period terms and ....
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....s. We accordingly direct the AO / TPO to determine the credit period allowed by the comparable companies and treat only such trade receivables that are outstanding beyond the arm's length credit period, as international transactions. Once the above exercise has been done, we direct computation of interest for the delayed realization of trade receivable over and above the arm's length credit period till the date of its realization or the financial year end, whichever is earlier. It is ordered accordingly. Therefore, ground 15 is allowed for statistical purposes. TP adjustment on interest on outstanding receivables (Ground 16) 29. It is submitted by the learned AR that adopting a notional rate of 4.3836% for imputing interest is excessive and unreasonable. In support of the submission, the learned AR placed reliance on the judgment of the Hon'ble High Court in the case of CIT v. Aurionpro Solutions Ltd. (ITA 1869/2014) and the ITAT order in the case of M/s.Bioplus Life Sciences Private Limited v. DCT (ITA No.3150/Bang/2018 - order dated 23.03.2022). The assessee, therefore, sought adoption of markup of LIBOR+2%. 30. The learned DR drew our reference to the order of the Tribu....
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....,04,152 14,04,152 Add: Provision no longer required 1,32,527 written back Operating Revenue (INR) 107,84,20,217 107,82,87,690 Personal costs 74,54,14,686 74,54,14,686 Transcription outsourcing 11,18,94,243 11,18,94,243 expenses Other operating expenses 7,19,20,677 7,19,20,677 Depreciation Operating Cost 40,61,698 93,32,91,304 40,61,698 93,32,91,304 Document 3 Operating Profit (INR) Margin considered (OP/OC) ALP as per TPO order (refer page 140 of appeal set) TP Adjustment (INR) 3 per cent range computation Particulars Revenue (INR) (based on TPO order) Operating Expenses PBIT Plus/Minus 5% margin 14,51,28,913 14,94,96,386 15.55% 15.54% 22.34% 6,35,00,891 Plus 3% Minus 3% 111,06,36,321 104,59,39,059 93,32,91,304 93,32,91,304 17,73,45,017 11,26,47,755 19.00% 12.07% Reference No.of comparables ITeS Selected by assessee 11 Rejected by the TPO 9 Accepted by the TPO 2 New comparables introduced by 5 the TPO Final set of TPO LO 5 Refer TP study at pg 153 of PB Refer TPO order 121- ....