TaxTMI 
TaxTMI 
TaxTMI 
2022 (3) TMI 1567
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....essee company is functioning as captive business process outsourcing (BPO) unit of its Parent Company (MDE USA). The assessee company filed its return of income on 11.10.2010 declaring total income of Rs.1,85,411/-. Since the assessee company, during the impugned assessment year, had entered into certain international transactions amounting to Rs.17,50,33,942/- with the Associated Enterprises covered under section 92CA of the Income Tax Act 1961, the A.O. referred the matter to the Transfer Pricing Officer ["TPO"] for determination of the Arms Length Price ["ALP"] of the international transaction. 2.1. During the course of T.P. assessment proceedings, the TPO noted that the assessee has entered into international transactions with it's A.Es in respect of ITES Services amounting to Rs.17,50,33,942/-. The assessee has used Transaction Net Margin Method ["TNMM"] as the method and OP/TC as the Profit Level Indicator [ "PLI"]. The assessee has arrived at a set of 15 companies with an average margin of 18.07%. The assessee's own margin is worked-out to be 2.75%. Based on the analysis, the assessee has concluded that its international transactions are at arm's length. 2.2. After going t....
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....e facts, in the circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeals) - 44 ['CIT (A)'] erred in upholding the order of the Ld. Assessing Officer [AO]/ Ld. Transfer Pricing Officer [TPO] dated 28.04.2014 & 23.01.2014 respectively to the extent prejudicial to the appellant, is bad in law and liable to be rejected. 2. On the facts, in the circumstances of the case and in law, the Ld. CIT(A) grossly erred in confirming adjustments made by the Ld. TPO to the arm's length price of international transactions entered into by the appellant with overseas associated enterprises ('AEs'). 2.1 Approving comparables selected by the Ld. TPO on arbitrary ground even though such comparable functionally dissimilar to appellant. 2.2 Rejecting comparables selected by the appellant in the economic analysis in Transfer Pricing Study misconceived and arbitrary ground even though such comparable functionally similar to appellant. 2.3 Not granting an adjustment to the appellant for working capital and capacity utilization adjustments in the margins of the appellant or comparables. 3. That the Ld. CIT(A) grossly erred on facts and in law by not appreciating the fact tha....
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....e company and, therefore, the same should be excluded. 4.3. Referring to the decision of the Coordinate Bench of the Tribunal in the case of JCIT vs., Steria India (P.) Ltd., [2021] 123 taxmann.com 264 [Delhi-Trib.], he submitted that Acropetal Technologies Limited (Segmental) was excluded from the list of comparables on account of outsourcing of significant work. 4.3.1. Referring to the decision of Bangalore Bench of the Tribunal in the case of ACIT vs., Flextronics Technologies (India) Pvt. Ltd., reported in 101 taxmann.com 348 (Bang.Tribu.), he submitted that Acropetal Technologies Limited (Segmental) was excluded due to the functional difference as it is providing Engineering Design Services, whereas assessee was providing ITES Services. 4.3.2. Referring to the decision of Coordinate Bench of the Tribunal in the case of Bechtel India (P.) Ltd., vs., DCIT reported in [2019] 101 taxmann.com 385 (Delhi-Trib.), he submitted that Acropetal Technologies Limited (Segmental) was excluded as it fails employee cost filter i.e., Outsourcing of Significant work. 4.3.3. So far as the observation of the Ld. CIT(A) that assessee has not submitted the annual report of the abovementioned co....
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....t financial year ending cannot be the sole basis of rejection of comparable. He accordingly submitted that the Acropetal Technologies Limited (Segmental) should be excluded, CG-VAK Software and Export Limited and R System International Limited should be included and correct profit margin of Cosmic Global as well as the assessee should be re-computed. 5. The Ld. D.R. on the other hand heavily relied on the order of the Ld. CIT(A). He submitted that Acropetal Technologies Limited (Segmental) was rightly excluded by the Ld. CIT(A) on account of dissimilar functional profile and the assessee has not submitted the annual report of the abovementioned company. 5.1. So far as the exclusion of CG- VAK Software and Export Limited is concerned, the Ld. D.R. submitted that it fails the turnover filter of Rs.5 crores average by the TPO and, therefore, the turnover of CG- VAK Software and Export Limited being Rs.82.78 lakhs this company was rightly excluded by the TPO and the Ld. CIT(A). 5.2. So far as R System International Ltd., is concerned, the Ld. D.R. submitted that this company has different financial year ending and, therefore, it was rightly excluded by the TPO and the Ld. CIT(A). 5....
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....e of such items cannot be expressed at any generic term. It had earned foreign exchange into the business of exporting software services and 100% of its revenue comprises of export earnings. The company identifies scope for huge business in the Middle East, Europe and U.S. From the various details furnished by the assessee we find Acropetal Technologies Limited (Segmental) has incurred significant expenditure on Research and Development and Advertising and Marketing and Sales Promotion. Further it has significant outsourcing of work. Therefore, we find merit in the submissions of the Learned Counsel for the Assessee that Acropetal Technologies Limited (Segmental) cannot be included in the list of comparables. 6.2. We find the Coordinate Bench of the Tribunal in the case of JCIT vs., Steria India (P) Ltd., (supra), while upholding the order of the DRP in excluding Acropetal Technologies Limited (Segmental) has observed as under : "Acropetal Technologies Ltd. 108. As could be found from the annual report of Acropetal Technologies Ltd, this company is into the engineering design service, information technology service, and healthcare and this company employees cost is less than ....
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....n of their business. Similar exclusion was made by the Bangalore Bench of the Tribunal in the case of Asstt. CIT v. Flextronics Technologies (India) (P.) Ltd. [2019] 101 taxmann.com 348. 112. We have also gone through the observations of the Tribunal in respect of the Acropetal Technologies Ltd, wherein the arguments similar to the ones advanced in this matter are considered and this comparable is excluded. All these additions have application to the facts involved in this case for this assessment year, in such decisions we hold that Acropetal Technologies Ltd is not a proper comparable to the assessee and its exclusion by the Ld. DRP cannot be found fault with. Such an exclusion is accordingly confirmed." 6.3. We find the Bangalore Bench of the Tribunal in the case of ACIT vs., M/s. Flextronics Technologies (India) Pvt. Ltd., (supra) dismissed the appeal filed by the Revenue against the order of the DRP in excluding Acropetal Technologies Limited (Segmental) from the list of comparable companies by observing as under : "8. In the grounds of appeal, the revenue has challenged the exclusion of only one of the 8 comparables excluded by the order of DRP. The companies exclusion b....
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....Annual Report shows that this company has 4 divisions viz., Engineering Design Services, Healthcare, Enterprise Solutions and Infrastructure Solutions. Perusal of the order of TPO at page 25 shows that the TPO has considered engineering design services segment profit margin of this company for the purpose of comparison with the profit margins of the assessee company. The functions performed by the Engineering Design Services of this company are as follows:- Architectural, Structural, Electrical, Plumbing, Steel Detailing, External Utilities, Design Engineering." 11. The functions performed by the assessee, as we have already seen is back office services relating to finance and human resource functions, including accounts payable to assessee, remote server access, maintenance and management services, payroll processing, credit analysis, ledger maintenance, etc. for its affiliates worldwide. It is thus clear that the information technology services provided by the assessee cannot be compared with Engineering Design Services provided by Acropetal Technologies Ltd. Therefore, the conclusion that this company is not functionally comparable is found to be correct. We also find that t....
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.... stood more or less oil the same pedestal. According to him, applying the yardsticks laid down by Hon'ble Delhi High Court in the judgment of Rampgreen Solutions P. Ltd (supra), Acropetal Technologies Lid. could be taken as a good comparable. 23. We have perused the orders and heard the rival contentions. There is no dispute that M/s. Acropetal was having at least three segments, namely, engineering design services, IT service and health care. TPO had taken engineering design service as a good comparable with that of the services done by the assessee. Engineering Design Sendees that were being rendered by Acropetal Technologies Lid, appears at page 8 of its annual report. It comprised of architectural, structural, electrical, plumbing, steel detailing, and utilities designing. Its revenue model appears at page 9 of its annual report. It is mentioned that the said company was providing comprehensive offerings using its deep domain understanding of infrastructural healthcare, engineering design and enterprise solutions. In our opinion, the type of services that was being provided by Acropetal Technologies Ltd, was not at all comparable with the type of services that the assesse....
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.... of comparable companies. Consequently ground Nos. 1 to 10 raised by the revenue are dismissed." 6.4. Similar view has been taken in various other decisions relied on by the Learned Counsel for the Assessee. Under these circumstances, we hold that Acropetal Technologies Limited (Segmental) cannot be held as comparable on account of different functionality, significant expenditure on Research and Development and Advertising and Marketing and Sales Promotion Expenses and significant Outsourcing of Work. We, therefore, set aside the order of the Ld. CIT(A) on this issue and direct the A.O./TPO to exclude Acropetal Technologies Limited (Segmental) from the list of comparables. 6.5. So far as inclusion of R System International Limited is concerned, we find the Ld. CIT(A) rejected the contention of assessee by observing as under : "(iii) R System International Limited: (a) The above mentioned company has been rejected by the TPO on the ground that the financial year of the company did not end in March. While the contention of the appellant is acceptable in principle, the appellant has not demonstrated how data from earlier or subsequent a financial year followed by the....
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....he application of the said filter. The contention of the appellant is rejected." 6.9. We find the Coordinate bench of the Tribunal in the case of Ameriprise India Private Limited vs. DCIT (supra), following the decision of Hon'ble Delhi High Court in the case of Chrys Capital Investment Advisors (India) P. Ltd. vs. DCIT (supra), has held that CG-VAK Software and Export Limited cannot be excluded on account of low turnover as long as the said company is functionally comparable with that of the assessee company. The relevant observations of the Tribunal at para15.2 read as under : 15. CG-VAK Software and Exports Ltd. (Segd 15.1 The assessee included the segmental figures of this company in the list of comparables. The TPO eliminated this company on the ground that it was providing software services and ITES and its turnover from ITES was only 0.83 crore, which was less than the requisite turnover. 15.2 Having heard both the sides on this issue, we find that the TPO has accepted the functional comparability of this company on segmental level. The Id. DR was also fair enough to candidly accept the functional similarity of the relevant segment of this company. In such circumstanc....
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.... ignoring the decision of the Hon'ble Supreme Court in the case of Mumbai International Airport Pvt. Ltd. vs. Golden Chariot Airport with regard to the "Doctrine of Elector and the "Doctrine of Approbation and Reprobation", wherein it has been laid down that a litigant is not altered to change and choose its stand to suit its convenience ? 3 Whether on the facts and circumstances of the case, the Ld. CIT(A) is legally justified in laying down very stringent standards of comparability and attempting to identify exact replica of the assessee for comparability analysis by ignoring the fact that the Indian Law and the International jurisprudence recognizes the reality that there cannot be exact comparables in a given situation without any differences and without appreciating the fact that such stringency will defeat the purpose of flexibility provided in comparability analysis for determination of ALP under TNM Method ? 4 That the appellant craves leave to add, amend, alter or forgo any ground/(s) of appeal either before or at the time of hearing of the appeal." 8.1. The Revenue in the grounds raised by it has basically challenged the order of the Ld. CIT(A) in directing the A.O. ....
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....hnologies Limited from the list of comparables by observing as under : "51. We have carefully considered the submissions on behalf of either side. From the material papers on record, we notice that in respect of the argument of the assessee that Accentia has undertaken extraordinary events namely, amalgamation with Asscent Infoserve Private Limited during the year, Id. TPO observed that the acquisitions are made by companies to benefit from each other's strengths, but the acquisitions in themselves do not become extraordinary events, except when the company's functions change substantially after an acquisition the same may become non-comparable; also that when the acquisitions have abnormal impact on normal operations of the business, it will be considered a peculiar circumstance. According to the Id. TPO, assessee tailed to point out how acquisition has affected the operations of the company. However, there is no denial of the fact of amalgamation taking place during the year. As a matter of fact, it is not clinched before us that the acquisitions have no or insignificant impact on normal operations of the business. So also, there is no denial of the fact that M/s.....
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....ny was also directed to be excluded by a co-ordinate Bench of this Tribunal in the case of Smart Cube India (P.) Ltd. (supra) on the basis that it is engaged in provision of medical transcription services and sale of software and therefore cannot be regarded as comparable to a ITES service provider. It is pertinent to note that these observations are in respect of the AY 2011-12. We find it necessary and convenient to extract the relevant observations of the Tribunal: 46. Now we take up the issue of selection of various comparable companies. With respect to Accentia Technologies Ltd., it is seen that it provides service to healthcare industry in the nature of medical transcription, medical coding etc. and revenue's earning from those fields are more than 75%. Before us, Learned AR has pointed to the fact that it owns significant intangible assets in form of goodwill etc. amounting to Rs.21.94 crores and it also owns proprietary software products. Further, he has also pointed out to the fact that though it is engaged in the medical transcription and development of software products but the segmental profitability is not available in the financial statements. The aforesaid cont....
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....his issue is dismissed. 8.6. So far as Fortune Infotech Limited is concerned, we find the Ld. CIT(A) while directing the TPO to exclude the above company from the final set of comparables has observed as under : "(ii) Fortune Infotech Limited: (a) The main contention of the appellant is that the above mentioned company has a dis-similar functional profile and that it owned unique intangibles. (b) The Hon'ble Delhi Tribunal in the case of Vertex Customers Services in ITA No. 1508/Del/2015 for AY 2010-11 has held the above mentioned company to be incomparable on the ground that it was offering onsite and offsite services to various clients and was also into web designing services; that its revenue had diminished by 54.52% as compare to the previous year which showed presence of peculiar economic circumstances; owned software called 'Finetran' and 'Image Index' for performing specialized services in medical transcription. (c) In view of the above, Fortune Infotech Limited is not comparable to the appellant which is a low end BPO company. In accordance with the principle of consistency and respectfully following the order of Hon'ble ITAT in the case of Vertex Customers Service....
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....From the various details furnished by the Learned Counsel for the Assessee in the paper book, we find this company is functionally different and insufficient segmental information respect of IT and ITES services are available. Further this is an exceptional year of operation on account of amalgamation. Apart from M/s. Vertex Customer Services India Private Limited (supra) relied on by the Ld. CIT(A), we find the Coordinate Bench of the Tribunal in various decisions has also directed to exclude Igate Global Solutions Limited from the list of comparables on account of exceptional year of operation on account of amalgamation. In absence of any contrary material or distinguishable feature brought to our notice by the Ld. D.R, we do not find any infirmity in the order of the Ld. CIT(A) in directing the A.O./TPO to exclude Igate Global Solutions Limited from the final set of comparables. We, therefore, uphold the order of the Ld. CIT(A) on this issue. The ground raised by the assessee on this issue is accordingly dismissed. 8.10. So far as ICRA Techno Analytics Limited (Segmental) is concerned, we find the Ld. CIT(A) directed the A.O./TPO to exclude this company from the list of compara....
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....g services. It is also noted that it has two income segments of services and sales and it does not have the complete segmental information with respect to both the segments of services and sales as fixed assets and services are used inter-changeability. In view of this we find that this company is functionally not comparable as well as it does not have complete segmental information with respect to the sales and service segments. In the result we direct the Transfer Pricing Officer to exclude the above comparable." 8.13. Similar view has also been taken in other cases by the Coordinate Benches of the Tribunal. We, therefore, uphold the order of the Ld. CIT(A) on this issue and the grounds raised by the Revenue challenging the exclusion of ICRA Techno Analytics Limited (Segmental) is dismissed. 8.14. So far as the order of the Ld. CIT(A) in the case of Infosys BPO Limited is concerned, we find the Ld. CIT(A) while directing the A.O./TPO to exclude this company from the list of final set of comparables has observed as under : (iv) Infosys BPO Limited: (a) The main contention of the appellant is that the company had dis-similar functional profile and that the company had a high ....
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....rs countries in Europe as well as India while being a subsidiary of Steria (UK). On the other hand Infosys BPO Ltd. is a part of the Infosys Group, a giant in the field of Information Technologies Services and being a part of the Infosys Group, 'Infosys', it thus enjoys significant brand presence and brand value plays a significant role in its ability to generate profit. The- Hon'ble Delhi High Court in the case of Oracle (OFSS) BPO Services (P.) Ltd. (supra) upheld the exclusion of entity on the basis of significant brand presence on entity on the basis of significant brand presence and brand value of an entity. This decision of the Hon'ble High Court of Delhi was later upheld by the Hon'ble Apex Court in Oracle (OFSS) BPO Services (P.) Ltd. (supra). On identical lines, the Hyderabad Bench of ITAT in the case of Hyundai Motors India Engineering. (P.) Ltd. v. ITO [2014] 44 taxmann.com 34/[2015] 152 ITD 112 directed the exclusion of Infosys BPO Ltd. from the final set of comparables by holding that, "....'presence of a brand commands premium price and the customers would be willing to pay, for the services/produced of the company. Infosys BPO is a established....