TaxTMI 
TaxTMI 
2020 (6) TMI 834
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....ompanies as comparables even though they are not comparable in respect of functions performed, risks assumed, assets utilized, size, turnover, despite having unusual business circumstances or high margins, etc.; • Genesys International Corporation Ltd. • Infosys Ltd. • Larsen & Toubro Infotech Ltd. • Persistent Systems Ltd. 4(h) Making negative working capital adjustment which is impermissible and not appropriately computing the working capital adjustment while computing the ALP. 5(d) Adopting following companies as comparables even though they are not comparable in respect of functions performed, risks assumed, assets utilized, size, turnover despite having unusual business circumstances or high margins, etc; • Universal Print Systems Ltd. (Seg) • Infosys BPO Ltd. • TCS E-Serve Ltd. • BNR Udyog Ltd. (Seg) • Excel Infoways Ltd. (Seg) • 5(h) Making negative working capital adjustment, which is impermissible and not appropriately computing the working capital adjustment while computing the ALP. Corporate Grounds:-....
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....egment. And finally has selected 10 comparables in the software development services segment referred at page 13 Para 8.4 of the order as under : Similarly, the TPO has rejected the comparables selected by the assessee in ITES segment, and the assessee company filed objections on proposed final comparables. The TPO has considered the assessees objections and has selected the final set of comparables in the ITES segment refereed at page 21 Para 9.5 of the order as under : Finally Tpo has made negative working capital adjustment and nil risk adjustment and determined ALP referred at page 25 Para 13.4 of the order as under : The TPO has passed the order under Section 92CA dt.20.01.2016 determining the ALP in software development services and ITES aggregating to Rs.5,31,01,901/-. The TPO/AO found that the assessee has debited software expenses and AMC charges in respect of software purchases but details were not submitted. Further made addition of loyalty bonus for calculation of book profit in computation of tax liability under Section 115JB of the Act and passed the order under Section 143(3) r.w.s. 144C (1) of the Act dt.28.03.2016. Aggrieved by the order, the assessee has ....
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....I Electronics Pvt. Ltd. Vs. DCIT .IT(TP)A No.2005/Bang/2016 Dt.10.03.2017. (iii) In the case of L & T InfoTech Limited- the turnover is Rs2,959 Crores and has substantial onsite operations and functionally different with high brand value. Further, based on the turnover filter, the company was excluded in the case of UEI Electronics Pvt. Ltd. Vs. DCIT (supra) for the Asst. Year 2012-13. (iv) Persistent Systems Limited- the turnover of the company is Rs.810 Crores which is more than the turnover criteria of Rs.200 Crores with rpt of 14.42% and incurred high R &D expenses. Further there is amalgamation and extraordinary event in the year and functionally different. The said company was excluded based on the turnover filter criteria in UEI Electronics Pvt. Ltd. Vs. DCIT (supra). 6. We find the co-ordinate Bench of the Tribunal in the case of UEI Electronics Pvt. Ltd. vs. DCIT. IT (TP) A No.2005/Bang/2016 dt10.03.2017 has dealt on the issue of exclusion of 3 comparables at page 2, Para 3 & 4 of the order which is read as under : Accordingly, we fallow the judicial precedence, and direct the TPO/Assessing Officer to exclude the comparables on turnover filter crite....
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.... third party transactions and making a negative working capital adjustment. AO/TPO is directed to examine this issue and work out the working capital adjustment afresh, as certain comparable companies are being considered separately. In case the working capital adjustment comes negative, AO/TPO is directed not to make any negative working capital adjustment as the same is not approved in various Co-ordinate Bench decisions. The Co-ordinate Bench of ITAT in the case of Adaptec (India) P. Ltd., Vs. ACIT in ITA. No. 206/Hyd/2014 (AY 2009-10) dt. 25-03-2015, has decided the issue of negative working capital as under: "10. Ground No.8 pertains to the issue of negative working capital. As briefly stated above, after arriving at the arithmetic mean of all comparables at 22.03%, the A.O. worked out negative working capital adjustment of 3.22% thereby, making arms length price at 25.25%. Even though, DRP refused to interfere with the objections of the assessee in its order, we were informed that DRP has directed the TPO/A.O. not to make any negative working capital adjustment in some of the cases in the next assessment year, in the cases of Market Tools Research P. Ltd., and Mega S....
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....thmetic mean margin of the comparables shall not be made." 11. In view of the above, we are of the opinion that assessee's case being similar, there is no need for making any negative working capital adjustment when assessee does not carry any working capital risk. In fact, TPO should have done necessary working capital adjustment to the profits of the selected comparables so as to make them comparable to the assessee. In view of this, we direct the TPO not to make negative working capital adjustment"." 16. From the above paras, we find that in this case also, the issue is decided by Tribunal by following Tribunal order rendered in the case of Adaptec (India) Pvt. Ltd. Vs. ACIT (supra) and we have already seen that this Tribunal order is not relevant in the present for the reasons mentioned above and therefore, we hold that this Tribunal order is also not applicable in the present case. We also find that in para 5 of the synopsis of arguments reproduced above, this is the submission of the assessee that the basis of the working capital adjustment is the existence of a difference in the cost of working capital and it is also stated that this is relevant because....
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....omprises brand value which will tend to influence its business operation and the pricing policy thereby directly impacting the margins earned by the Infosys BPO Ltd.. We find the submissions of the ld. counsel for the assessee before TPO/DRP that in order to maintain the brand image of Infosys BPQ Ltd. in the market, the company incurs substantial selling and marketing expenditure whereas the assessee being a contract service provider does not incur such expenses to maintain its brand has not been controverted by them. Further, Infosys BPO Ltd. being a subsidiary of Infosys has an element of brand value associated with it. This can be further confirmed by the presence of brand related expenses incurred by Infosys BPO Ltd. Further, Infosys BPO Ltd. has acquired Australian based company M/s Portland Group Pty Ltd. during financial year 2011-12. They provide sourcing and category management services in Sydney, Australia. Therefore, this company also failed the TPO's own filter of rejecting companies with peculiar circumstances. In view of the above i.e. functionally not comparable, presence of brand and extraordinary event that has taken place during the year on account of acquisi....
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....essee which was 30.6 crores. It was also submitted on behalf of the assessee that this company has related party transaction (RPT) over and above the threshold limit of 15% and is also functionally different. The assessee in this regard at the time of hearing placed reliance on the decision of ITAT Bangalore Bench in the case of Indegne Pvt. Ltd., Vs. ACDIT in IT(TP)A No.591/Bang2017 for asst. year 2012-13 order dated 2/8/2017 wherein at page 10 of this order in para 10.3.2 the Tribunal remanded the matter of comparability of this company with ITES company. Decision in the case of M/s e4e Business Solution India Pvt. Ltd., Vs. ITO in IT(TP)TP No.451/Bang/2017 was also filed in support of assessee's claim for remand on functional comparability. The Tribunal in the impugned order however in paragaraph 13 to 13.2 followed the decision rendered in the case of CGI Information Systems and Management Consultation Ltd., Vs. ACIT-TS-320-ITAT-2018(Bang) wherein this company was considered as comparable with ITeS company. The Tribunal however did not render any decision on functional comparability of this company. On the above objections in the MP, the Tribunal recalled the original order for....
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....xclusion of this company on the ground that this company was functionally different from the assessee company and the employee cost to the revenue was less than the threshold limit of 25% and that there were peculiar economic circumstances which impacted the profit margin of this company thereby rendering this company as not comparable company. The Tribunal while adjudicating of exclusion of this company in paragraph 14.3 of its order held that on application of employee cost filter that the Assessee has failed to show as to how the findings of the TPO and DRP are not correct. 10. The assessee has pointed out certain facts with regard to employee cost and diminishing revenue of this company which takes it out of the comparability and these aspects have not been considered by the Tribunal in its order. On the above objections in the MA, the Tribunal held as follows:- "8. We have examined the contents in the misc. petition and we find that there has been omission to consider the application of employee cost filter by the Tribunal though attention of the Bench was invited to relevant pages pointed out in the misc. petition. We do not however agree with the assessee t....
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....n the decision of co- ordinate bench of the Tribunal in IT(TP)A No.1616/Bang/2017 Dt.27.06.2018 in the case of Tecnotree Convergence Pvt. Ltd. Vs. DCIT and dismissed the ground of appeal and the same decision shall equally apply. Accordingly, we dismiss this ground of appeal in ITES segment. 9. The learned Authorized Representative argued that, the A O has disallowed software expenses Rs.15,35,172/-for non-deduction of TDS under Section 40(a)(ia) of the Act, further the assessee has purchased the software, which is revenue in nature and hence there is no requirement of TDS on such payments .whereas the ld. DR supported the order of the lower authorities. 10. We heard the rival submissions and perused the material on record. Prima facie, the assessee is engaged in software development services and ITES and incurred expenses for purchase of software and AMC charges. The LdAr emphasized on revenue expenditure but could not support with evidences. Further there is no clarity in respect of deduction of tax at source. Hence, considering the facts and circumstances, we are of the opinion that the assessee has to establish that recipient/payee has paid the tax on income and discharge....
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....set of comparables are arrived as per the discussions in the following paragraphs. Sl. No. Name of the Case 1 Accentia Technologies Ltd. 2 Universal Print Systems Operating Operating Income Cost 126,38,02,000 112,89,16,000 6,17,67,000 3,87,49,000 OP/OC 11.75 52.46 Ltd.(Seg)(BPO) 34 Informed Technologies India Ltd. 1,96,36,431 1,82,45,770 6.08 Infosys BPO Ltd. 1316,75,11,974 962,91,06,964 36.30 5 Jindal Intellicom Ltd. 30,27,51,875 30,29,02,990 -0.05 6 Microgenetic Systems Ltd. 1,29,93,217 1,08,63,390 19.61 7 TCS E-Serve Ltd. 15,78,44,000 9,64,28,000 63.69 8 BNR Udyog Ltd. (Seg)(Medical 1,47,04,000 97,87,000 50.61 Transcription) 9 10 Excel Infoways Ltd. (Seg)(IT/BVPO) e4e Healthcare Services Pvt Limited 790,96,95,000 559,06,04,000 29.79 89,50,04,209 74,59,23,078 19.85 Average PLI 28.11% Document 4 13.4. Computation of Arm's Length Price: The arithmetic mean of the Profit Level indicators is taken as the arm's length margin. Please see Annexure B for details of computation of PLI of the comparables. Based on this, the a....
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....sfying the turnover filter because the turnover of this company is Rs. 96 Crores as against the turnover of the assessee company of Rs. 18.45 Crores but the remaining 3 companies are not satisfying this filter because turnover of these companies at Rs. 31254 Crores, Rs. 2960 Crores and Rs. 810 Crores respectively is much in excess of 10 times of the turnover of the assessee company. He submitted that still, the assessee is requesting for exclusion of three companies also on the basis of functional dissimilarity and not on the basis of turnover filter. Regarding the claim in the chart for inclusion of 3 companies i.c. 1) R Systems International Limited, 2) Thinksoft Global Limited and 3) Cigniti Technologies Limited, he submitted that this request for inclusion of these 3 companies is not pressed. Learned DR of the revenue supported the orders of the lower authorities. He also placed on record written submissions as per which it is contended that before relying on any judgment as precedence, the AR of the assessee has to establish that the facts in the present case and the cited case is identical. In support of this contention, he placed ....
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....] ii. Swiss Re Global Business Solutions India Private Limited FS-307- ITAT-2017(Bang) Functionally different filter: i. M/s XL Health Corporation India Pvt. Ltd. v. ACIT IT (TP)A No. 2311/Bang/2016 ii. iii. Baxter India Pvt. Ltd. V. ACIT ITA No.6158/Del/2016 CGI Information Systems and Management Consultants Private Ltd. vs ACIT-TS-320-ITAT-2018(Bang) 12.2 On the other hand, Id.CIT(DR) opposed its exclusion. He submitted that this company is engaged in KPO services and there is no difference between KPO and ITeS. 12.3 We have heard rival submissions and perused material on record. The issue of comparability of this company was considered by the co-ordinate bench of Tribunal in the case of M/s.XLHealth Corporation India Pvt. Ltd. vs. ACIT in IT (TP)A No.2311/Bang/2016 dated 09/02/2018. The relevant findings of the Tribunal are as under: "... We have heard the rival submissions and perused the material on record. From the perusal of the Annual Report of this entity placed at page nos. 583 to 678 of paper book, at page no. 604 it is stated as under. "2. COMPANY OVERVIEW Your Company, along with its subsidiary com....
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....high profit margin by ipse facto cannot be a reason to exclude it from list of comparables. Reliance is also placed on the decision of the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) (P.)Ltd vs. Dy.CIT (376 ITR 183) (Delhi) 11.2 Aggrieved, assessee-company is in appeal before us in the present appeal. It is contended before us that M/s. Universal Print Systems Ltd., cannot be selected as comparable as it is functionally different as it is engaged in rendering services in printing industry and also fails employee cost filter. Reliance in this regard was placed on the following decisions: i. M/s XL Health Corporation India Pvt. Ltd. V. ACIT IT(TP)A No. 231 1/Bang/2016 ii. iii. 11.3 CGI Information Systems and Management Consultants Private Ltd.-ITAT-2018(Bang)-TP First Advantage Offshore Services Pvt. Ltd. v DCIT [IT(TP)A No. 1086/Bang/2011] On the other hand, Id.CIT(DR) opposed its exclusion. The findings of the TPO are based on information contained in the Annual Report and the TPO had considered only relevant segmental details. 11.4 We heard rival submissions and perused th....
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....outsourcing services provided mainly with the assistance or use of information technology. It was also submitted that this company does not satisfy the definition of ITES as contained in Rule IOTA(e) of the Rules. Since use of information technology is absent .in the various services provided by this company, it cannot be regarded as ITES company. The Assessee also submitted that this company fails the employee cost filter. The employee cost filter requires that the employees cost incurred by the company must be more than 25% of its revenue. 48. The TPO at page-20 of his order has dealt with the above objections by observing as follows: (a) Pre-Press BPO unit provides back office support services. (b) This company has four major segments viz., Repro, Label Printing, Offset Printing and pre-press BPO. The employee cost of pre-press BPO was more than 25% of the revenue from pre-press BPO and therefore the employee cost filter is satisfied in the case of this company. (c) On the service revenue filter viz., the requirement that a comparable company must have revenue from rendering services of more than 75% of its total revenue, the....
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....ng regard to the same base; (iii) the net profit margin referred to in sub-clause (if) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub- clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction. (2) For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the....
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....e the order of the DRP in this regard and remand for fresh consideration by the TPO the comparability of this company. In terms of Rule 10B(3) of the rules the profit margins of Pre-Press BPO have to be adjusted taking into account the fact that two other segments supplement the pre-press BPO segment. If such adjustment cannot be reasonably or accurately made then this company has to be excluded from the list of comparable companies. The TPO for this purpose can use his powers u/s. 133(6) of the Act to get required details from this company. As far as the argument that this company fails functional comparability, we find that none of the objections raised by the Assessee in this regard about lack of information about allied services performed by die pre-press BPO segment of this company and the break-up of the revenue from such allied services have been dealt with specifically by the TPO or DRP. Since the comparability of this company is being remanded to be TPO for consideration of adjustments as mentioned above, the objection with regard to functional comparability should also be looked into by the TPO in the remand proceedings on the ....