AI Drafter - (New and Powerful) 
Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter. 
TaxTMI 
TaxTMI 
2024 (1) TMI 57
X X X X Extracts X X X X
X X X X Extracts X X X X
....10B of the Income-tax Rules,1962 ("the Rules"). 2. That on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred in arbitrarily selecting comparable companies based on incorrect appreciation of functional, asset and risk profile, and arbitrary filters. 2.1 That on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred in arbitrarily selecting the following companies based on incorrect appreciation of functional, asset and risk profile, and applying arbitrary filters: (i) Infosys BPM Ltd., (ii) S P I Technologies India Pvt. Ltd., (iii) Inteq BPO Services Pvt. Ltd., (iv) Manipal Digital Systems Pvt. Ltd., (v) CES Ltd., and (vi) Vitae International Accounting Services Pvt Ltd. 2.2 That on the facts and circumstances of the case and in law, the AO / TPO have erred in arbitrarily rejecting the comparable company, namely, R Systems International Ltd. (seg) on the ground that the same was not found in search matrix without appreciating that the same is functionally comparable. The DRP further erred in upholding the same basis the filter of different finan....
X X X X Extracts X X X X
X X X X Extracts X X X X
....en made under section 14A of the Act. 9. That on the facts and circumstances of the case and in law, the AO / DRP have erred in making disallowance under section 14A without appreciating that the Appellant has not incurred any expenditure in earning the exempt income. 10. That on the facts and circumstances of the case and in law, the AO has erred in computing interest under section 234B and 234C of the Act. Each of the above grounds is independent and without prejudice to the other grounds of appeal preferred by the Appellant. The Appellant prays for leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal." 2.1 The Ld.AR has also filed an application dated 25.10.2023 seeking admission of following additional ground of appeal: "1. That on the facts and circumstances of the case and in law, the company namely Datamatics Financial Services Ltd. is not comparable to the Appellant as it has different functional. asset and risk profile." 2.2 The Ld.AR submitted that the above comparable was left out to be considered in the original grounds of appeal t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....erence, the Ld.TPO called upon assessee to file the economic details of the international transactions between the assessee and its AE. It was noted that assessee had following international transactions. 3.3 The Ld.TPO noted that assessee had computed its margin at 15.15% by considering OP/OC as the PLI and TNMM as the most appropriate method. It was noted that assessee had selected 8 comparables having a median of 14.23%, the details of which are as under: 3.4 The assessee thus computed its transaction to be at arms length. Dissatisfied with the analysis carried out by assessee, the Ld.TPO after carrying out search matrix came out with a new set of 8 comparables wherein 5 comparables of assessee were included and 3 new comparables were added with a median of 24.37%, the details of which are as under: No. Company Name F.Year wise OP/OC (%) Wt. Average 2016-17 2015-16 2014-15 1 Sundaram Business Services Ltd. 9.21 0.99 -3.95 2.08 2 Jindal Intellicom Ltd. 8.66 2.78 11.07 7.41 3 Fuzen Software Pvt. Ltd 15.07 16.06 16.98 15.93 4 Microland Ltd.(seg) 18.72 14.02 19.30 17.53 5 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....parables being R Systems International Ltd. (seg) and Interglobe Technologies Pvt. Ltd. 4.3 The Ld.AR has submitted that Ground no. 4.1 has been raised by assessee seeking application of turnover filter which the assessee do not wish to argue. Accordingly, this ground has been not pressed by the Ld.AR. The additional ground raised by the assessee is seeking exclusion of Datamatics Financial Services Ltd. as functionally not similar. 4.3.1 Thus from the above, assessee is seeking following comparables for exclusion. 1. Infosys BPM Ltd. 2. SPI Technologies India Pvt. Ltd. 3. Inteq BPO Services Pvt. Ltd. 4. Manipal Digital Systems Pvt. Ltd. 5. CES Ltd. 6. Datamatics Financial Services Ltd. 4.3.2 The assessee is seeking inclusion of ; a) R Systems International Ltd. (seg) b) Interglobe Technologies Pvt. Ltd. 4.4 Before we undertake the comparability analysis, it is sinequa non to understand the FAR of the assessee under the ITeS segment. The Ld.AR has referred to the transfer pricing study report placed at page 183 of the paper book wherein the FAR of the assessee has been submitted to be as under: ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ining the customer relationship with respect to the work outsourced to NTS India. As mentioned above. NTS India is not directly involved in any frontending. g) Pricing policy with customers NTS India renders services to Nuance Inc_ under a fixed price arrangement. Pricing policy as regards end clients is determined by Nuance Inc.. and prices are to be negotiated with the end clients by Nuance Inc. only. h) Billing and collection Nuance Inc. being the contracting entity is responsible for invoicing to the end customers. It is Nuance Inc.'s responsibility to ensure that the payments are received from the customers as per the billing milestones agreed. i) Recruitment and training Nuance Inc. is involved in the interview process of senior level employees of NTS India. The final round of interview for head of the departments are conducted by Nuance Inc. Nuance Inc. is also involved in framing the annual appraisal policy and review of the annual appraisal process. Nuance Inc. provides basic guidelines with respect to the mandatory training to be conducted for employees of NTS India. Nuance Inc. also owns an online training platform called "Enrich", which is used by ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 251,796,576 Nuance Inc. owns the intangible property rights in the products sold to customers. Thus, NTS India has no ownership right, legal or economic, on any intangible generated or on the outcome of any intangible generated or arising during the course of rendering of medical transcription services. Risk Analysis This section provides a discussion of the risks that NTS India and the AE assume through their business operations related to international transactions. An understanding of the elements of risk is important as it helps to characterise the companies: a necessary step in understanding of the type of benchmarking data required. The degree of risk depends on several factors including the service provided and parties involved, the markets targeted, competition and other general business risks. A description of the risks borne by NTS India and its AE vis-a-vis the international transaction undertaken are discussed in Table 10 below: TABLE 10: RISK ANALYSIS NTS India Nuance Inc. 1. Market risk Market risk arises for a business due to increased competition and relative pricing pressures. change in demand patterns and needs of customers. inability....
X X X X Extracts X X X X
X X X X Extracts X X X X
....0 days as per the agreement. Nuance Inc. is responsible for all credit and collection activities including credit checks, billing, and collection procedures and thus. is individually responsible for all baddebt expenses. 6. Manpower risk This risk relates to scarcity of skilled professionals and high labour turnover in the industry that affects the fortunes and operations of any company. NTS India bears manpower risk. However, manpower related costs including training and recruitment forms part of the cost base of NTS India which is billed to Nuance Inc. and therefore this risk is mitigated. Nuance Inc. being the entrepreneur bears the ultimate manpower risk since it has the responsibility to ensure timely delivery to its clients. 7. Foreign exchange risk This risk relates to the potential impact on profits that may arise because of changes in foreign exchange rates. NTS India bills Nuance Inc. INR however the payment is received in USD. The forex fluctuation forms part of the cost base of NTS India and hence the risk due to fluctuation in foreign currency is mitigated. Since. the forex loss also forms part of the total cost marked up for invoicing, the u....
X X X X Extracts X X X X
X X X X Extracts X X X X
....IC CHARACTERISATION Description of services Name of the entity Characterisation of the entity Medical transcription services Nuance Inc. Principal / entrepreneurial risk bearing entity NTS India Limited risk back-office service provider Based on the above, we shall consider the comparables sought for inclusion / exclusion. Ground no. 2.1 5. At the outset, the Ld.AR has submitted that the Coordinate Bench of this Tribunal in case of Exxonmobil Services and Technology Pvt. Ltd. vs. DCIT in IT(TP)A No. 958/Bang/2022 vide order dated 12.07.2023 for A.Y. 2017-18 has considered the following comparables. 1. Infosys BPM Ltd. 2. SPI Technologies India Pvt. Ltd. 3. Manipal Digital Systems Pvt. Ltd. 4. CES Ltd. 5. Datamatics Financial Services Ltd. 5.1 It is submitted that the assessee in Exxonmobil Services and Technology Pvt. Ltd. vs. DCIT (supra) was a captive service provider like that of assessee and therefore it has been held that the above comparables are not functionally similar with that of a captive service provider like assessee. He thus prayed for exclusion of these comparables from the final list as....
X X X X Extracts X X X X
X X X X Extracts X X X X
....her such differences between employees is going to materially affect the margin of the comparables. On the basis of billing rates / skills no conclusion could be drawn that margins in different segments of ITES services is also different. This is because if the billing rate is high in the high end services, the cost of the employees who are highly qualified/skilled also goes up steeply and, therefore, the margins are not much affected. Intact, no evidence has been produced before us to show that margins in the high end segments of ITES services is high compared to low end services. Therefore, ld. DRP was unable to accept the argument advanced by learned AR that the comparables belonging to high end segments such as KPO etc. should be excluded from the comparability list on this ground alone. In fact, KPO is a term given to a branch of BPO in which apart from processing data, knowledge is also applied. In view of the above, ITeS services cannot be further classified as BPO and KPO services for the purpose of comparability analysis. Under the TNMM, functional similarity is more relevant than product similarity. Accordingly, the ld. DRP rejected this plea of the assessee. 7.2....
X X X X Extracts X X X X
X X X X Extracts X X X X
....acquisition of IPR during the year. The intangibles shown in the Asset Schedule are only computer software acquired for the business. Even the assessee has such computer software to the extent under the head intangible asset. The assessee also did not point to any information in the annual report to indicate that the intangibles have materially affected the profitability of the company as required in clause (i) of sub-rule (3) of Rule 10B. Taking into account all these aspects, we do not find any material difference so as to affect comparability. Hence, these pleas are rejected. 7.6 In view of the above, the pleas of assessee were rejected and selection of this company was upheld by the ld. DRP. 8. We have heard the rival submissions and perused the materials available on record. This issue came up for consideration before this Tribunal in the case of Eurofins IT Solutions India Pvt. Ltd. for the AY 2017-18 in IT(TP)A No.186/Bang/2022 dated 5.1.2023, wherein held as under: "7. We have heard the rival submissions and perused the materials available on record. Similar issue was considered in the case of Morgan Stanley Advantage Services P. Ltd. in ITA No.65....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the same time accepting the comparables selected by the Transfer Pricing Officer from the database for knowledge process outsourcing companies. 13. As regards the rejection of four companies, it is the submission of learned counsel of the assessee that the functions of Eclerx Services Ltd. and Vishal Information Technologies Ltd. (earlier Coral Hub Ltd.) has been held to be not comparable to the assessee by the ITAT for the assessment year 2007 - 08. In this regard, we find that ITAT in the aforesaid order has observed as under: 32. As noted earlier the Id AR for the assessee submitted that the assessee submits that Eclerx Services Ltd. has not considered as a comparable in earlier years. Eclerx Services Ltd. is a Knowledge Process Outsourcing (KPO) Service provider which is not comparable to assessee; assessee is engaged in providing back office support services. In support of his submission, the Id. AR of the assessee relied upon the decision of Delhi High Court in Rampgreen Solution P Ltd Vs CIT (2015) ITR 533 (Delhi). The TPO included this comparable by taking his view that this company is in date process and analytical services. The Id CIT(A) confirmed the ac....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rent, and as such was liable to be excluded from the final list of comparables. That our aforesaid view stands fortified by the aforesaid order passed by the Tribunal while disposing of the appeal of the assesses own appeal for A.Y. 2005-06, as well as the judgment of the Hon'ble High Court of Delhi in the case of : Rampgreen Solutions (P.) Ltd. (supra). Thus as there has been no material shift in the facts involved in the case of the assessee for the year under consideration, as observed by us hereinabove, we are thus of the considered view that as the business model of the aforesaid comparable, viz. Coral Hub Ltd. (supra) is substantially different from that of the assessee, therefore the same cannot be accepted as a comparable and hence is directed to be excluded from the list of comparables. 14. Accordingly, following the aforesaid decision of the tribunal, we hold that the Eclerx Services Ltd. and Vishal Information Technologies Ltd. (earlier Coral Hub Ltd.) are liable to be rejected as invalid comparable. As regards the other comparables namely Crossdomain Solutions and Datamatics Financial Services, we find that the Transfer Pricing officer and the ld. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....income from business process management services. The company's catering to a variety of industries does not change the nature of functions carried out as it is committed to provide best in class services to both horizontal and vertical focus areas. In view of the above information in the annual report, the ld. DRP did not find any meri t in the plea that this company is functionally different, and that it has diversified activities, and hence these pleas were rejected by him. 10.1 The ld. D.R. further submitted that a plea was also raised before the ld. DRP by the assessee that this company is into high end ITES service provider, and hence not comparable. The ld. DRP was unable to accept such plea, as under TNMM, there is no requirement that the comparables should render the same or identical services. It would be sufficient, if the services fall under the broad industry segment ITES. In this regard, the ld. DRP observed that the Hon'ble Bangalore Tribunal in the case of GE India Technology Centre Private limited Vs. Dy. Director of Income Tax (ITA No. 789/Bang/2010 & ITA Nos 487 & 925/Bang/2011 observed that TNMM requires only broad comparability. The relevant ob....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r not more reliable data are available. It is rather clarified that before broadening the search to include a large number of potentially comparable uncontrolled transactions based on similar functions being undertaken, thought should be given to whether such transaction are likely to offer reliable comparables for the controlled transaction. Therefore the Guidelines are unambiguously suggesting that 'comparability factor' do not restrict to 'functional analysis' and the importance of FAR as a major comparability factor can't be over emphasized but one needs to carry out the process again and again till the exactly reliable comparable is found." 10.3 In case of Aztec Software Technology Vs ACTT [2007] 294 ITR (A.T.) 32 (Bang), the ITAT has observed following with respect to TNMM: "The TNMM requires establishing comparability at a broad functional level. It requires comparison between net margins derived from the operation of the uncontrolled parties and net margin derived by an associated enterprise on similar operation" 10.4 The ld. DRP further observed that in the case of TCL holdings Pvt. Ltd., vs. Assistant Commissioner of Income T....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ned from 'Revenue from business process management services' which suggests that the company is engaged in consultancy and management services unlike the Appellant which is involved only in providing ITES as a captive service provider entity. 13.2 Further, Infosys BPO Limited has been excluded in the case of Swiss Re Global Business Solutions India (P.) Ltd. [2022] 137 taxmann.com 417 (Bangalore - Trib.) AY 2016-2017 (He referred Page 162-163 of the Case Law Compilation, Para 11 - 21). Below is the relevant extract from the order for ready reference: 11. The ld. AR submitted that Infosys BPM Ltd. should be rejected as a comparable because it is functionally not comparable, has diversified activities and lack of segmental data, different business model, brand profits, various revenue models, presence of intangibles, outsourcing costs, marketing expenses and turnover. It offers business outsourcing solutions to several clients and span across multiple industry segments. The company's catering to a variety of industries does not change the nature of functions carried out as it is committed to provide best in class services to both horizontal and vertical ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 16. Regarding the lack of segment data to reject it as a comparable, the DRP was of the view that when it has been held that all the services being done by this company falls in the category of ITeS, then the absence of segmental information remains a theoretical argument. 17. The assessee has also argued that this company has significant intangibles and brand and hence not functionally comparable. The DRP noted that the expenditure incurred towards brand was just Rs. 19 crore which is meagre considering its operating revenue of Rs. 3050 crores. Further, the assessee could not point to any information from the annual report to indicate brand has contributed to the revenue growth or profitability. Therefore, the presence of brand, as such, has not affected comparability. Further, there is no information in the annual report to indicate that the company has undertaken any major R&D initiatives & own intangibles. Therefore, the presence of intangible in the form of goodwill, which is also insignificant, as the value is only Rs. 19 crore compared to the revenue from operations of Rs. 3050 crores do not have any impact on the profits of the company. Hence, these pleas were re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ny has been considered as in the case of ADP Pvt. Ltd. cited (supra and held that this company cannot be included by observing as under: - "16.1 Infosys BPO Ltd.: The ld. AR submitted that this company may be excluded from the final set of comparables for the reason that this company has incurred outsourcing costs for FY 2013-14, FY 2014-15 and FY 2015-16 and the outsourcing cost incurred by this company reflects a different operating model and hence cannot be compared with the assessee company. Further, he submitted that while this company operates under various revenue model as per the assignments i.e., proportional completion method on rendering services, whereas the assessee charges a mark-up on the cost incurred to provide the services. Further, he submitted that since the cost structure and revenue model of this company is different with that of the assessee, this company ought to be rejected as a comparable company. He relied on the decision of the co-ordinate bench in assessee's own case ADP (P.) Ltd. (supra) wherein the coordinate bench excluded this company as comparable. 16.2 The ld. DR, on the other hand, submitted that presence of outsourcing cost....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es. As far as M/s. TCS E-Serve Ltd., is concerned, the Coordinate Bench of ITAT in the case of M/s Hyundai Motors India Engineering P. ltd in ITA Nos. 1743/Hyd/2014 (AY.2010-11) & ITA No. 1917/Hyd/2014 (AY.2010-11) dt. 13-11-2015, has decided the issue as under: ITA No 2233 of 2018 ADP Private Ltd Hyderabad "TCS e-SERVE LIMITED 11.2.1. As regards TCS e-Serve Limited is concerned, we find that it possesses brand value as is evident from the Schedule-N (Operation and Other expenses) to the P & L A/c of the annual report for the financial year 2009-10 of Rs. 46,065 thousands and also that it possesses intangibles in the form of software licenses which have not been taken note of by the authorities below while adopting its margin. It is also the case of the assessee that this company has a turnover of Rs. 1405.10 crores which is 25 times of the turnover of the assessee and hence, is not comparable to the assessee. The Ld. Counsel for the assessee had also placed reliance upon the TPO's order in the case of M/s. IGS Imaging Services India Ltd., to hold that there are exceptional circumstances during the relevant financial year due to which this company is not compa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....m the order of DRP excluding the above company from the list of comparables.' We observe from the financial statements of this company, that this company is functionally dissimilar and use robotics automation and diversified activities. Therefore, following the decision of the coordinate bench, we direct the AO/TPO to exclude this company as comparable for determining ALP. 13.7 In view of the above order of the coordinate bench of Hyderabad, we direct the AO/TPO to exclude this company viz. Infosys BPO Ltd. from the list of comparables from the final list of ITeS segment. ................................................................................................... ................................................................................................... ................................................................................................... 11 In view of the above order of the Tribunal, which is a group company of the assessee, and having same profile of the assessee, we direct the TPO to exclude (i) Infosys BPO Limited, (ii) SPI Technologies India Private Limited, and (iii) Eclerx Services Limited ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....logy enabled services that means pre-press activities mainly to overseas as well as domestic customers". Therefore, the ld. DRP observed that the pleas raised based on information said to be available in the website are liable to be rejected is in limine in view of the information given in the annual report on the functional aspect. 12.2 Further, the ld. DRP observed that this company operates under a single primary segment. The profit margins of various comparables will be averaged and a variation of 3% is also permitted. These aspects take care of some differences which are bound to be there between various comparables. In view of the above, he observed that ITeS services cannot be further classified as BPO and KPO services for the purpose of comparability analysis. Under the TNMM, functional similarity is more relevant than product similarity. It is a fact that this company falls in the category of ITeS. Hence, the objection on the functional dissimilarity of the company was rejected by the ld. DRP. 12.3 The ld. DRP further observed that that as regards lack of segmental information, the comparable company derives the whole revenue from sale of services and hen....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on Mountain Services Ltd. in IT(TP)A No.307/Bang/2022 dated 20.9.2022 has held as under:- 16. "The next company the assessee seeks to exclude is Manipal Digital Systems Pvt. Ltd. In this regard, it was submitted that this company is engaged in provision of multiple high-end services including KPO activity like Design Services, Animation. It was submitted that no segmental details were available in the financial statements on the variety of services provided by this company like Design Services, Animation. Reliance was placed on the decision of the ITAT, Pune Bench in the case of Credence Resource Management Pvt. Ltd., (supra) wherein this company was excluded by the Pune Bench with the following observations: "8. The assessee submits that the Manipal Digital Systems Private Limited is functionally different from the assessee which is involved in provision of ITes services. As per the annual report of the company, the activity undertaken by the company is in the nature of pre-press activities which is not comparable to the assessee. That further in the website of the company, it is engaged in the diversified set of activities which involves graphic solutio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nue cannot say that since majority of the earning of the said company comes from ITes, it is comparable company with that of the assessee company. 12. Placing strong reliance on the decision of the Honble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. Vs. CIT, ITA No.102/2015 dated 10.08.2015 copy of which is placed before us, the Ld. Counsel brought to our notice at Para 31 wherein the Hon'ble Delhi High Court observed that the Tribunal had held that once a service falls under the category of ITes then there is no subclassification of segment. Thus, according to the Tribunal, no differentiation could be made between the entities rendering ITes. The Hon'ble Delhi High Court rejecting such view of the Tribunal had held that such a view, if upheld, would be contrary to the fundamental rationale of determining ALP by comparing controlled transactions/entities with similar uncontrolled transactions/entities. ITes encompasses a wide spectrum of services that use Information Technology based delivery. Such service could include rendering highly technical services by qualified technical personnel involving advanced skills and knowledge, such as engineering, design ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nstance. The Tribunal proceeded to hold that a relatively equal degree of comparability can be achieved by selecting potential comparables on a broad functional analysis at ITeS level and that the comparables so selected could be put to further test by comparing specific functions performed in the international transactions with uncontrolled transactions to attain relatively equal degree of comparability. 34. We have reservations as to the Tribunal's aforesaid view in Maersk Global Centers (India) Pvt. Ltd. (supra). As indicated above, the expression 'BPO' and 'KPO' are, plainly, understood in the sense that whereas, BPO does not necessarily involve advanced skills and knowledge; KPO, on the other hand, would involve employment of advanced skills and knowledge for providing services. Thus, the expression 'KPO' in common parlance is used to indicate an ITeS provider providing a completely different nature of service than any other BPO service provider. A KPO service provider would also be functionally different from other BPO service providers, inasmuch as the responsibilities undertaken, the activities performed, the quality of resources employe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....P. The methodology necessitates that the comparables must be similar in material aspects. The comparability must be judged on factors such as product/service characteristics, functions undertaken, assets used, risks assumed. This is essential to ensure the efficacy of the exercise. There is sufficient flexibility available within the statutory framework to ensure a fair ALP." 13. The Ld. Counsel for the assessee further submitted therefore, it is clear that merely because two companies are doing ITes services, on general categorization comparability is not permitted and one has to look into the specific services rendered in the spectrum of ITes and for this reason, the said company i.e. Manipal Digital Systems Private Limited is not a comparable company with that of the assessee company since absolutely functionally different. The Ld. Counsel also submitted that the TPO should have specifically stated why he has selected this company as comparable with that of the assessee company since the onus is on him to give reason for such inclusion. The logic was shown from the decision of the Pune Bench of the Tribunal in the case of M/s. Tasty Bite Eatables Limited Vs. ACIT, ITA N....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Years 2016-17 and 2017-18 and therefore the decisions cited above are applicable to Assessment Year 2017-18 also. 18. We have given a careful consideration to the rival submissions and are of the view that it would be just and appropriate to set aside the question of comparability of Manipal Digital Systems Pvt. Ltd., to the TPO/AO to examine as to whether the functional profile of the assessee and the assessees in the decisions cited by the learned AR remains the same in Assessment Year 2017-18 as it was in Assessment Year 2016- 17." 12.1.10 Accordingly, the above comparable i.e. Manipal Digital Systems Pvt. Ltd. is directed to be excluded from the list of comparables." 13.1 In view of the above, we direct the AO/TPO to exclude this company Manipal Digital Systems Pvt. Ltd. from the list of comparables. (IV) CES Ltd. (seg): 14. The ld. A.R. submitted that CES Limited ("CES") is functionally different and therefore ought to be rejected. Functionally Different - engaged in KPO services 15. The ld. D.R. submitted that the ld. DRP in his report observed that the principal business activity of the company is IT enabled ser....
X X X X Extracts X X X X
X X X X Extracts X X X X
....16-17 wherein held as under: 8.1 This comparable was also chosen by the TPO. The assessee's objection that this company was engaged in rendering KPO services as well was not approved by the TPO, who went with its inclusion. 8.2 The Annual report of this company shows that it is engaged in both the IT and IT enabled services. As the company has segmental accounts, the TPO has considered only IT enabled services segment for the purposes of comparability. However, what is important to note in the instant context is that the assessee is rendering only translation services etc., which fall within the overall domain of the BPO services. As against this, CES Limited is engaged in providing both BPO and KPO services as has been reported by it to the Registrar of companies in the requisite form. The Pune Benches of the Tribunal in Credence Resource Management Pvt. Ltd. Vs. ACIT (ITA No.133/PUN/2021) vide its order dated 18-06-2021 has noted that CES Limited is rendering both BPO and KPO services, discussing this issue at page 19 of the order. In view of the fact that the assessee is engaged in rendering only BPO services, CES Limited providing both BPO and KPO ser....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pward shift of the BPO industry in the value chain. Thus, BPO trying to upgrade itself as KPO is likely to render both BPO as well as KPO services in the process of evolution and therefore, such an entity cannot be considered strictly as either BPO or KPO. The comparability of transaction or the selection of comparables in our view has to be examined in terms of the rules framed in this regard. The Rule 10B (2) provides that the comparability of international transaction with uncontrolled transactions has among other things to be judged with the reference to characteristics of services provided, functions performed, asset employed and risk assumed. It has therefore to be insured that functions of the comparables and characteristics of services rendered are similar. Viewed from this angle, ld. DRP observed that all companies which are in ITES segment are providing similar services and difference is in the internal working which is reflected through difference in qualifications and skills of the employees. In all these cases employees are the main assets who are providing various services using Information Technology (IT). The main difference is the skills/qualification of the employ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rvices for the purpose of comparability analysis. Under the TNMM functional similarity is more relevant than product similarity. Accordingly, the ld. DRP reject this plea of the assessee. 17.3 In view of the above factual information available in the annual report regarding the ITES activities performed by the company the contentions of the assessee that it is not clear from annual report extracts as to what services does the company engage in is totally baseless and factually incorrect. Accordingly, the company is functionally comparable. 17.4 The ld. DRP further observed that as regards lack of segmental information, the comparable company derives the whole revenue from sale of services and hence, there is no need of segmental reporting as per AS 17. As stated above while discussing the functional profile the company derives its total revenue from the ITES activities only. This is further supported by clarificatory note No. 2.14 at page 75 of the annual report that Segment reporting. The Company's business comprise only of providing data processing and related services. Accordingly, there is no other reportable primary business segment as per Accounting Stan....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... have not been seem to have any potential deriving any substantial benefit. The company, as per information does not own any significant IPRs. Further, the ld. DRP observed that the assessee has failed to demonstrate its significant positive impact on the financials of the company. Further the ALP margin is determined with reference to the average profit margin of a comparable for three years and also taking into account the defined median value of the PLIs of the comparable. These will even out such differences. It will not be proper to reject a comparable only on account of intangibles which otherwise is functionally comparable. 17.8 Therefore, all these objections were rejected by the ld. DRP and this company was upheld to be a comparable. 18. We have heard the rival submissions and perused the materials available on record. This issue came up for consideration before this Tribunal in the case of NTT Data Information Processing Services Pvt. Ld. in IT(TP)A No.297/Bang/2021 dated 7.7.2022, wherein held as under: "11. We have heard the rival submissions and perused the materials available on record. The main contention of the Ld. A.R. is that TPO rejecte....
X X X X Extracts X X X X
X X X X Extracts X X X X
....een excluded in Mindteck (India) Ltd. vs. DCIT (supra) by Coordinate Bench by observing as under: "(f) Inteq BPO Services Pvt. Ltd. 27. The Ld. A.R. for the assessee submitted that this company is engaged in providing services in the nature of Revenue Cycle Management, Claims processing services and document & data processing. The information available in the website of this company in support of the same was submitted before the TPO (He referred Page 572 of Paperbook). 27.1 He further submitted that this company earns income entirely from Business Process Management (BPM) related services and relevant extracts from its annual report in support of the same are as follows. Page 1493 of Annual Report Compilation 27.2 He submitted that the ITAT in Vee Technologies (P.) Ltd. v PCIT [(2022) 139 taxmann.com 229 (Bang-Trib) - Page 1751-1752 of Case law compilation], following the decision of its co-ordinate bench in EMC Software and Services (P.) Ltd v JCIT (2020) 115 taxmann.com 293, held that a company involved in business process management services cannot be considered comparable to a company providing ITeS such as the assessee. 27....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ervices and cannot be considered as a comparable to a company providing ITeS such as the assessee. Being so, we direct the AO/TPO to exclude Inteq BPO Services Pvt. Ltd. from the list of comparables. Directed accordingly." 5.5.4 Nothing contrary to the above has been brought on record by the Ld.DR. We therefore do not find any reason to interfere with the above observations. Respectfully following the view taken in Mindteck (India) Ltd. vs. DCIT (supra) by Coordinate Bench, we direct exclusion of this comparable from the final list. Accordingly, ground nos. 2.1 and additional ground raised by the assessee stands partly allowed. 6. Ground nos. 2.2 and 2.3 For inclusion a) R Systems International Ltd. (seg) b) Interglobe Technologies Pvt. Ltd. 6.1 The Ld.AR submitted that this company is functionally similar with that of assessee as it provides business process outsourcing services similar to that of assessee. The Ld.AR submitted that the TPO excluded this comparable as it did not come within the search matrix carried out by the revenue. On an objection raised before the DRP, the DRP rejected the comparable as this company was having different financi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... that proper opportunity of being heard must be granted to assessee. Accordingly, ground nos. 2.2 and 2.3 raised by assessee stands allowed for statistical purposes. 7. Ground no. 4 is general in nature and therefore do not require any adjudication. 8. Ground no. 5 is raised by assessee for not granting working capital adjustment. 8.1 After hearing the contentions of both the sides, we are of the opinion that this issue is no longer resintegra as this issue is covered by the decision of Coordinate Bench of this Tribunal in case of Huawei Technologies India (P.) Ltd. v. Jt. CIT reported in (2019) 101 taxmann.com 313 wherein this Tribunal has held as under: "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 page 173 & 192 of the assessee's paper book. No defect wha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....was disallowed by the Ld.AO. The Ld.AR submitted that assessee had made investment in its associated companies by purchasing compulsory convertible preference shares and that, there was no income earned from such investments. He placed reliance on the decision of Hon'ble Karnataka High Court in case of Biocon Ltd. vs. DCIT reported in 431 ITR 326, wherein it was held that, without any exempt income accrued to the assessee during a year no disallowance can be made u/s. 14A of the Act. He placed reliance on the following decisions in support of the contentions. * Schneider Electric IT Business India (P) Ltd. vs DCIT: [2022] 143 taxmann.com 66 (Bang - Tribunal) * CIT vs. Chettinad Logistics Pvt. Ltd., [2017] 248 Taxman 55 (Madras High Court) confirmed by the Hon'ble Supreme Court in [2018] 257 Taxman 2 (SC) * PCIT vs Era Infrastructure (India) Ltd. [2022] 448 ITR 674 (Delhi) * UB Infrastructure Projects Limited vs. DCIT in ITA No. 2098/Bang/2016 dated 22.12.2017 [Bang. Trib.] * DCIT vs Goldman Sachs Services Pvt. Ltd.: IT(TP)A No. 63/Bang/2014 * Anriya Project Management Services (P) Ltd vs. DCIT: 1799/Bang/2013 * CIT ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ecords placed before us. It is noted that admittedly there is no exempt income earned by assessee during the year under consideration. Hon'ble Delhi High Court in case of Cheminvest Ltd. vs. CIT reported in (2015) 61 taxmann.com 118 has held that in such circumstances, no disallowance u/s. 14A could be made. The disallowance therefore cannot be made in the hands of the assessee based on the above decision and the same is directed to be deleted. Accordingly, ground nos. 6-9 raised by the assessee stands allowed. 10. Ground no. 10 raised by assessee is consequential in nature and therefore do not require any adjudication. In the result, the appeal filed by the assessee stands partly allowed. Order pronounced in the open court on 22nd December, 2023. ============= Document 1 Particulars Medical transcription services Outstanding trade International Transactions Receivables/Received Payables/Paid Method 2.33,96,99,684 VE TAX 41,59,66,810 receivables Unearned revenue Outstanding trade payables Outstanding receivables Total 1,81,53,809 TNMM TNMM TNMM 1,03,18,848 TNMM 79,31,324 TNMM 2,78,17,51,627 1,03,1....