TaxTMI 
TaxTMI 
2023 (9) TMI 1615
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....tional transactions that took place between the Assessee and its AEs were the provision of SWD services by the Assessee for a price of Rs. 578, 30, 55, 985/-; the provision of ITeS by the Assessee for a price of Rs. 784, 95, 77, 795/-; and the provision of MSS by the Assessee for a price of Rs. 1, 42, 35, 69, 547/- . The Assessee realized a profit margin^1 of 13%, 17% and 8% in respect of the SWD, ITES and MSS segments, respectively. (iii) Upon a reference being made by the Assessing Officer to the TPO, the TPO determined a TP adjustment in respect of each of the above three segments. This was done inter alia by recomputing the profit margin of each of the segments, by artificially adding to the operating cost base notional expenses towards employee stock option plan. (iv) Initially, a draft assessment order dated 29.03.2022 came to be passed by the Assessing Officer, in which the TP adjustment proposed by the TPO was incorporated. (v) On the corporate front, the Assessing Officer proposed various adjustments. Aggrieved, the Assessee filed its objections before the DRP which, vide its directions dated 30.12.2022, disposed of the objections ....
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...., 051/- Operating loss (Op. Income - Op. Cost) (Rs. 29, 06, 91, 066/-) Operating/Net mark-up (OP/TC) -4.79% *the TPO added notional cost related to share based compensation ('SBC') to the cost base. A.3. Filters applied by Assessee in its TP study: Step Description 1. Data for the period between 01.04.2014 and 31.03.2017 - selected 2. Companies with sales > 0 and other operating income/total sales > 50% - selected 3. Companies with ratio of average net fixed assets to sales <= 200% - selected 4. Companies having sales >= Rs. 1 crore in the previous year- selected 5. Companies with average net worth >= 0 - selected 6. Companies which have more than 25% related party transactions of the sales- excluded. 7. Companies with ratio of R&D expenses to sales <=3% - included 8. Companies which are functionally similar- accepted. A.4. Comparables selected by Assessee and the range of weighted average OP/TC of comparable companies: Sl. No. Company Name Weighted Average in % 1. Maveric Systems Ltd. 0.95 2. Melstar Information Technologies Ltd. 1.21 3. Kireeti Soft Technol....
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....51/- Mean margin of comparable set 27.43% Arm's length price Rs. 7, 73, 97, 75, 867/- Price received Rs. 5, 78, 30, 55, 985/- Shortfall being adjustment u/s 92CA Rs. 1, 95, 67, 19, 882/- 2.3 DIRECTIONS ISSUED BY THE DRP: The directions of the DRP in brief are as under: 2.3.1 The DRP accepted the contention of the Assessee as regards recharacterization of SWD services as contract R&D services and directed the TPO to remove the R&D filter. This resulted in inclusion of 27 comparables from the TPO's set which were earlier rejected by the TPO due to application of the R&D filter. 2.3.2 However, the DRP rejected the contentions of the Assessee seeking exclusions of the companies. As regards the Assessee's contentions seeking inclusion of comparable companies, the DRP directed the inclusion of (i) Rheal Software Ltd.; (ii) Maveric Systems Limited; (iii) Sagarsoft(India) Limited; (iv) CG VAK Software & Exports; and (v) Exilant Technologies Pvt. Ltd. 2.4 FINAL ASSESSMENT ORDER The Assessing Officer passed the final assessment order incorporating the TP adjustment of Rs. 1, 87, 59, 39, 046/-. 2.5 LIST OF COMPARABLES POST THE DRP'S DIRE....
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.... in FY 2017-18 pursuant to the adoption of Indian Accounting Standard (Ind AS 102); 4.3 erred in placing reliance on ruling from foreign tax courts without giving due cognisance to the Indian tax tribunal / court rulings; The Hon'ble Panel / Learned AO erred in upholding the actions of the Learned TPO. 5. Without prejudice to the contentions of the Appellant that SBC should not form part of cost base of the Appellant, the Hon'ble Panel / Learned AO erred in not considering the submission filed to provide for the allowability of the SBC expense or restrict the adjustment to only the mark-up. 6. The Hon'ble Panel erred in surmising that the Appellant has claimed a corresponding deduction of the notional costs relating to SBC thereby upholding the Learned TPO's action of erroneously computing the transfer pricing adjustment on the entire SBC cost along with a mark-up. 7. The Hon'ble Panel erred in failing to adjudicate on the Grounds corresponding to (5) and (6) above raised by the Appellant during the proceedings before the Hon'ble Panel. The Appellant has filed a rectification petition before the Hon'ble Panel. 4.1. Facts of this issue are that....
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....es, but some of the assets are provided by the AEs free of cost, and cost of these assets or the effect of depreciation on such assets is not included in the operating expenses. In the process of identification of a comparable entity, the FAR of the tested party and comparable entity should be similar. The comparison of FAR (functions performed, assets used, and risks assumed) suggests that assets used should also be similar. The cost of every item that is used to provide the services should be taken into account in computing the operating expenses. The taxpayers sometimes argue that third-party taxpayers also use some of the assets provided by the customers, and they are not charged for the same. It may be noted that in the case of the third-party taxpayer the remuneration methodology would be different. Companies like TCS, Wipro etc do not provide services based on cost-plus. No third party works on the cost-plus pricing methodology. It may determine a price based on likely expenses incurred, but a high mark-up is applied. Keeping in mind the fact, that depending on the quantum of operating expenses, the profit chargeable to tax will vary. Therefore, he submitted that it is incum....
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....the order of the Tribunal in the case of Radisys India Ltd. Cited (supra), wherein held as under: 15.7 "From the above it is clear that, no cost is charged to the assessee, and that the employees of the assessee is informed regarding the taxability of the option exercised by the employee. On perusal of the financials, it is noticed that, nothing has been debited as ESOP expenses. 15.8 We note that, the Ld. TPO has mentioned regarding treatment of ESOP's cost by an Israili company as under: "In two cases, Supreme Court of Israel held that whatever an Israeli company is remunerated at cost plus mark up by foreign affiliate for services the cost base should include ESOPs issued by foreign affiliate to Israeli company. In the instant cases, the foreign affiliate was directly issuing ESOPs to the employees of the Israeli company. The Israeli company did not route the ESOPs cost through P&L account due to which these expenses did not appear in the cost base." 15.9 We fail to understand the inference drawn by the Ld.AO/TPO by referring to the above example. The Ld.TPO has not drawn the complete facts of the case and has also not provided complete detail....
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....are Laboratory Pvt. Ltd.; iv. Aptus Software Labs Pvt. Ltd.; v. Cygnet Infotech Pvt. Ltd.; vi. Infobeans Technologies Ltd.; vii. Nihilent Ltd.; viii. Cadsys (India) Ltd.; ix. OFS Technologies Ltd.; x. Threesixty Logica Testing Services Pvt. Ltd.; xi. Pagetraffic Web-Tech Pvt. Ltd.; xii. Cybage Software Pvt. Ltd.; xiii. Consilient Technologies Pvt. Ltd.; xiv. Dun & Bradstreet Technologies & Data Services Pvt. Ltd.; xv. E-Infochips Pvt. Ltd. Larsen & Turbo Infotech Ltd.; xvi. Mindtree Ltd.; xvii. Persistent Systems Ltd.; xviii. Tata Elxsi Ltd.; and xix. Infosys Ltd. 13. The Hon'ble Panel / Learned TPO erred in excluding the following companies even though the same are functionally comparable to the SWD services provided by the Appellant: i. Melstar Information Technology Ltd., ii. Kireeti Soft Technologies Ltd.; iii. Isummation Technologies Pvt. Ltd.; iv. Yudiz Solutions Pvt. Ltd.; v. Evoke Technologies Pvt. Ltd.; vi. R S Software Ltd.; vii. E-Zest Solutions Ltd.; ....
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....cted accordingly. 10. Ground Nos. 15 to 17 of the assessee's appeal are reproduced as under: ITES segment 15. The Hon'ble Panel / Learned AO / Learned TPO erred in including Datamatics Business Solutions Ltd. in the final list of comparable companies even though such company fails the Export revenue > 75% of Total revenue filter as applied by the Learned TPO. 16. The Hon'ble Panel / Learned AO / Learned TPO erred in including CES Ltd. in the final list of comparable companies even though such company fails the Related Party Transaction > 25% filter as applied by the Learned TPO. 17. The Hon'ble Panel / Learned AO / Learned TPO erred in including the following companies in the final list of comparable companies even though such companies are functionally dissimilar to the ITES provided by the Appellant: i. Fuzen Software Pvt. Ltd.; ii. Tech Mahindra Business Services Ltd.; iii. Datamatics Business Solutions Ltd.; iv. Infosys BPM Services Pvt. Ltd.; v. Vitae International Accounting Services Pvt. Ltd.; vi. Manipal Digital Systems Pvt. Ltd.; vii. CES Ltd.; viii. SPI Tech....
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....icated the nature of voice-based call centre services as IT enabled services only. Hence the company is into ITeS and functionally comparable to assessee company. In view of the above, the pleas of assessee were rejected by the ld. DRP and selection of this company was upheld. 11. We have heard the rival submissions and perused the materials available on record. In this case, the main contention of ld. A.R. is that this is not functionally comparable to the assessee's case. It is engaged in the BPO service provider delivering high end diversification support services and there was presence of significant intangibles and have high grant value. We have carefully gone through the financials of M/s. Tech Mahindra Business Services Ltd. Both the assessees are engaged in providing Voice based call centre services. However, the contention of the assessee's counsel is that they are functionally different and Tech Mahindra Business Services Ltd. is having high grant value and significant intangibles. In our opinion, these facts required to be examined at the end of ld. TPO/AO by comparing the financials of both these companies. Accordingly, this issue is remitted to the file of ld. TPO/A....
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....d as not comparable in the case of Eurofins IT Solutions India Pvt. Ltd. Vs. DCIT in IT(TP)A No. 186/Bang/2022 dated 5.1.2023, wherein held as under: "6. The ld. A.R. submitted that this company fails export earnings filter in last two years. Moreover, it is functionally different and engaged in KPO services providing B2B intelligence, sales and marketing, business process transformation and technology outsourcing solutions to its clients. Further, the company is engaged in rendering wide array of high-end services such as business research and analytics, content moderation solutions, registrar and transfer agent and other services. The key products and services it deals include (i) Business research and analytics (ii) content moderation solutions (iii) registrar and transfer agents (iv) market intelligence, innovation and technology intelligence. No segmental information - Aforementioned services do not fall within the ambit of ITES/BPO and the annual report does not provide either the segmental details or the broad classification of the income. 6.1 The CIT(A), NFAC observed that as per the Form No. MGT-9 forming part of the annual report, the principal....
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....s of assessee were rejected and selection of this company was upheld by the CIT(A), NFAC. 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. 6523/Mum/2014 dated 23.7.2020 for the AY 2008-09, wherein held as under: 10. We have carefully considered the submissions and perused the records. The assessee in the present case is a subsidiary of Morgan Stanley International Holdings Incorporated USA. The assessee provides back office support functions to its associated enterprises. The transactions of IT Enabled Support Services to its associated enterprises and the arms length price computed by the assessee was accepted by the revenue in A.Y. 2005 - 06 and A.Y. 2006-07. The same was also upheld by the ITAT for assessment year 2007 - 08. For the current assessment year, the Transfer Pricing Officer characterized the assessee's functions as knowledge process outsourcing KPO. Thereafter, the Transfer Pricing officer made general comments on the selection systems adopted by the assessee. He proceeded to reject the same. He did not speci....
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....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 action of the TPO by taking his view that this comparable company is into the health care receivable management and therefore renders ITeS services. The Hon'ble Delhi Court in Rampgreen Solution (P) Ltd (supra) held entities rendering voice call center services for customer support and a KPO service provider employ IT-based delivery systems, but characteristics of services, functional aspects, business environment, risks and quality of human resource employed are materially different; and therefore, benchmarking international transactions on basis of comparison of PLI of high-end KPO service providers with PLI of Voice Call Centers, would be unreliable. Further, Mumbai Tribunal in Wills Processing Services (India) Ltd. vs. ACIT (supra) on considering similar contentions excluded this comparable. 38. The Id. AR submitted as we recorded earlier that Coral Hubs Ltd. was outsourcing its s....
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....ices Ltd. and Vishal Information Technologies Ltd. (earlier Coral Hub Ltd.) are liable to be rejected as invalid comparable. As regards the other comparables namely Cross domain Solutions and Datamatics Financial Services, we find that the Transfer Pricing officer and the ld. CTI(A) have found their functions to be similar to that of KPO and that of E-clerx and Vishal technologies. Since, the ITAT has duly upheld the rejection of the aforesaid companies, i.e., these two companies are also liable to be rejected. Furthermore, Datamatics Financial Services also fails the export filter of 75% which has been adopted by the transfer pricing officer. Hence, in the background of aforesaid, we hold that following comparable are to be rejected: * Eclerx Services Ltd. * Vishal Information Technologies Ltd * Crossdomain Solutions * Datamatics Financial Services." 7.1 Accordingly, we direct the AO to exclude this company M/s. Datamatics Business Solutions Ltd. from the list of comparables as this company is a KPO company and not comparable to assessee company. 13.1 In view of the above, we direct the ld. TPO/AO to exclude M/s. Datamatics ....
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.... of Delhi in PCIT v. H & S Software Development and Knowledge Management Centre Pvt. Ltd. (ITA No. 912/2017 at internal page 2 of the order) upholding its exclusion and on the decision of this Hon'ble Tribunal in the case of Global E-Business Operations (P.) Ltd v. DCIT [ reported in [2022] 145 taxmann.com 413 (Bangalore - Trib.)], for the assessment year 2016-17. Thus, he submitted that Infosys BPO is liable to be excluded from the list of comparables. 14.4 The ld. D.R. relied on the order of ld. DRP. 15. After hearing both the parties, we are of the opinion that this company has been considered as not comparable in the case of Global e-Business Operations Pvt. Ltd. Vs. DCIT in IT(TP)A No. 212/Bang/2021 dated 27.9.2022 wherein held as under: "i. Infosys BPO Ltd. 13.1 The Ld. A.R. submitted that that Infosys BPO offers business process outsourcing solutions to its global clients by leveraging process, domain and people management expertise. The nomenclature in the prof it and loss account indicates that the income is earned from 'Revenue from business process management services' which suggests that the company is engaged in consul tancy and manage....
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....e evidence, it remains a theoretical argument without any backing with facts and figures and hence rejected it. 15. The assessee pointed out that this company has reported an amount of Rs. 136 crore as 'cost of Technical sub-contractors' which constitutes about 4.45% of total revenue of the company during the year. The DRP observed that the annual report mentions that these sub-contractors are used for operational activities. This is a common practice in almost all the companies to give a small portion of the work to some other subcontractors for a variety of reasons. This may allow the company to focus on its core activities. Sometimes it may be to meet the mismatch in certain skill-sets that are required in various projects. These expenses are incurred in the routine course of business. This cannot be held to be a criteria to affect the functional comparability of a company and more so in the facts of this case, wherein the sub-contracting expenses are about 4.45% only. This objection was accordingly rejected. 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....
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....surance, manufacturing, energy utilities communications and services and retail, consumer packaged foods, logistics and life services. Further in the annual report it has been mentioned that this comparable provides services that are different from routine backoffice services. This noting itself makes this comparable not functionally similar with that of assessee. Accordingly we direct this comparable to be excluded from finalist." 21. In view of the above order of the Tribunal, we are inclined to hold that this company should be excluded from the list of comparables. 13.3 The company has also been excluded in the case of ADP (P.) Ltd. [2022] 135 taxmann.com 44 (Hyderabad - Trib.) AY 2016-2017 by the Hyderabad Tribunal. 13.4 In view of the above-mentioned reasons, Ld. A.R. requested to direct the TPO to exclude this comparable from the final list of ITeS Segment. 13.5 Ld. D.R. relied on the order of Ld. DRP. 13.6 We have heard the rival submissions and perused the materials available on record. This company has been considered as in the case of ADP Pvt . Ltd. cited (supra and held that this company cannot be included by observin....
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....rvices in the year 2008-09 and heavy turnover is due to its takeover. Further, it was submitted that the company was functionally different as it has three different services and segmental information was not arrived. As far as E-clerx Services Ltd., it was submitted that this company caters to high end KPO services and cannot be compared to routine BPO services provided by assessee. The DRP vide para 3.10 has accepted the assessee's objections and accordingly, directed the TPO to exclude the above three companies. There are other directions of the DRP on TP adjustments on which neither party has raised grounds, except the Revenue on the above exclusion of three companies. 7. Referring to the order of the TPO, it was the contention of Ld.DR that DRP was not correct in excluding them on the basis of the turnover, whereas Ld. Counsel submitted that DRP has followed the decisions of the Co-ordinate Benches in excluding the above three comparables. 8. We have considered the rival submissions and perused the order of the DRP and Co-ordinate Benches. As far as M/s. TCS E-Serve Ltd., is concerned, the Co-ordinate Bench of ITAT in the case of M/s Hyundai Motors India ....
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....d as comparable to smaller companies like assessee therein. In the case before the Hon'ble High Court (supra), the turnover of the assessee was about Rs. 15.79 crores as against the turnover of Rs. 1016 crores of the Infosys. Considering these facts, the Hon'ble High Court had directed for exclusion of Infosys BPO because of its brand value and also on the grounds of functional dissimilarity and huge turnover. Though, the company before us is TCS e- Service Ltd., and not Infosys BPO, we find that the turnover of the assessee company for this assessment year is around Rs. 50 crores as against the turnover of TCS EServe Limited of Rs. 1405.10 crores. Therefore, following the turnover filter as well as taking note of the fact that it owns and possesses brand value and intangibles as compared to the assessee which does not own such assets, we direct that this company be excluded from the list of final comparables. Accordingly, assessee's grounds of appeal No. 6 is partly allowed. 8.1 Respectfully following the above decision of the Coordinate Bench, we confirm the order of DRP excluding the above company from the list of comparables.' ....
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..... Ltd. 18. The ld. A.R. submitted that this company has Diversified business activities. He submitted that in view of sufficient business information not being made available in the annual report, the Appellant has ascertained the activities of the company from its website. From the website, it can be seen that Manipal Digital is engaged in diversified activities including business of digital solutions and it provides services like digital content creations and has technology innovation centers. The services appear to be more in the nature of IT services rather than ITeS, and in any case are not in the nature of ITeS rendered by the Appellant. 18.1 He submitted that it is involved in activities such as CGI and 3D Digital services, packaging prepress, image retouching, learning and publishing etc. It also undertakes pre-media and e-book distribution services for domestic customers. These services clearly cannot be categorized ITeS. In the view of the above, he submitted that the activities / functions of Manipal Digital are complex and high-value creating, which are beyond the routine ITeS that the Appellant performs, in its role as a captive service provider. Accordingly, the....
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....rk, e-distribution contributes around Rs. 0.70 crores which is a minor revenue. The assessee, based on the website information, argued that the company is into diversified activities that can be classified as KPO services as per the definition of safe harbour rules. At the outset, the CIT (A) noted that the information put in website cannot be given complete credence, as they are mere forward looking information and statements with the motive of advertisement and other promotional gains. The functional aspect has to be determined by the information in the annual report which is based on audited financial statements and management reports, for qualitative analysis of comparability. The fact that the company is into ITES segment is corroborated by the corporate information given at page 45 of the annual report where it is lucidly stated that "the main business of the company is to provide information technology enabled services that means pre-press activities mainly to overseas as well as domestic customers". Therefore, the ld. CIT(A), NFAC 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 th....
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....t new share holding pattern of the company instead of the above information reported in the annual report. In fact, there are no material changes affecting the financial position of the company. Further, the assessee also could not point to any information to show, that on account of such acquisition, merger or change in the share holding pattern materially affected the profit margin of this company. Thus, the ld. CIT (A) was of the view that there are no material changes affecting the financial position of the company as per the information in the annual report. Hence, the plea raised by the assessee was rejected by the ld. CIT(A). 9. We have heard the rival submissions and perused the materials available on record. Similar issue was considered by this Tribunal in IT(TP)A No. 174/Bang/2022 dated 16.11.2022 for the AY 2017-18 in the case of M/s. Global E-Business Operations Pvt. Ltd. wherein it was held as under: 12.1.8 We have heard the rival submissions and perused the materials available on record. As per the annual report of the company, it is also in end-to-end content services across the value chain. From the website and annual report, it is clearly evident that....
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....t cannot be said reliable source of information as any company while projecting itself in public domain tries to shows its diverse functioning and range of products so as to create a brand image of itself. With these observations, the contention of the assessee was rejected and the company was taken as comparable company. 10. That before the Ld. DRP, objections have been raised by the assessee which are at running Page No. 34 of the appeal memo and therein, apart from reiterating the submissions made before the TPO, the assessee has stated that as per the online advertising laws and guidelines provided by the Advertising Standard Council of India, advertisements are based on principle of truthfulness and honesty of representation and there cannot be any misleading advertisement. That further, since the audited financial statements do not provide detailed description of operations/products in which the company deals, the website can be referred to for the analysis of functions performed by the company. The Ld. DRP vide Para (c) of Page No. 67 to 70 of its order and as per reasoning therein, had upheld the findings of the TPO and included Manipal Digital Systems Pr....
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....ely different, the demand and supply for the services would be different, the assets and capital employed would differ, the competence required to operate the two services would be different. Each of the aforesaid factors would have a material bearing on the profitability of the two entities. Treating the said entities to be comparables only for the reason that they use Information Technology for the delivery of their services, would, in our opinion, be erroneous. 32. It has been pointed out that whilst the Tribunal in Willis Processing Services (India) Pvt. Ltd. v. DCIT (supra) held that no distinction could be made between KPO and BPO service providers, however, a contrary view had been taken by several benches of the Tribunal in other cases. In Capital IQ Information System India (P.) Ltd. v. Dy. CIT, (IT) [2013] 32 taxmann.com 21 and Lloyds TSB Global Services Pvt. Ltd. v. DCIT, (ITA No. 5928/Mum/2012 dated 21st November 2012), the Hyderabad and Mumbai Bench of the Tribunal respectively accepted the view that a BPO service provider could not be compared with a KPO service provider. The Special Bench of the Tribunal in Maersk Global Centers (India) Pvt. Lt....
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....oad classification of ITeS which takes within its fold various types of services with completely different content and value. Thus, where the tested party is not a KPO service provider, an entity rendering KPO services cannot be considered as a comparable for the purposes of Transfer Pricing analysis. The perception that a BPO service provider may have the ability to move up the value chain by offering KPO services cannot be a ground for assessing the transactions relating to services rendered by the BPO service provider by benchmarking it with the transactions of KPO services providers. The object is to ascertain the ALP of the service rendered and not of a service (higher in value chain) that may possibly be rendered subsequently. 35. As pointed out by the Special Bench of the Tribunal in Maersk Global Centers (India) Pvt. Ltd. (supra), there may be cases where an entity may be rendering a mix of services some of which may be functionally comparable to a KPO while other services may not. In such cases a classification of BPO and KPO may not be feasible. Clearly, no straitjacket formula can be applied. In cases where the categorization of services rendered cannot be defin....
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....considered view on going through the order of the TPO, findings of the Ld. DRP and the various judicial pronouncements placed on record, first of all the Revenue has selected Manipal Digital Systems Private Limited as comparable to that of the assessee company based on the earning of the company from ITes. However, there is no segmental specification provided neither by the TPO nor by the Ld. DRP for the reason of such inclusion of this company in the final set of comparable companies with that of the assessee company. In the decision of the Hon'ble Delhi High Court (supra.), it is very much clear in the wide spectrum of ITes if two companies are to be comparable one has to look into the characteristic of service or business provided under ITes by them. This exercise was not done by the Department in this case. We also opine that as per Indian Council for Advertising, the online advertising has to be published on true and honest disclosure basis and therefore, when proper documentation of activities are not physically available, in such scenario, referring the website for information is correct option and the information therein cannot be doubted. These are all multi-national compa....
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....nificant intangibles: Company owns significant intangibles: FY 2014-15 (13.40%), 2015-16 (14.52%) and 2016-17 (5.12%) - Significant related party transaction: In FY 2014-15 the company has entered into RPT of 31.55%. 21.1 He placed reliance in this regard on the decision of this Hon'ble Tribunal in the case of Eurofins IT Solutions India (P.) Ltd. v. DCIT [reported in [2023] 147 taxmann.com 471 (Bangalore - Trib.)] for the assessment year 2017-18. Thus, he submitted that the company ought to be excluded. 22. The ld. D.R. relied on the order of ld. DRP. 23. After hearing both the parties, we are of the opinion that this issue came for consideration in the case of Eurufins IT Solutions India Pvt. Ltd. Cited (supra), wherein the Tribunal has held as under: 11. We have heard the rival submissions and perused the materials available on record. Similar issue came for consideration in the case of Transperfect Solutions India Pvt. Ltd in ITA No. 331/Pun/2021 dated 29.7.2022 for the AY 2016-17 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....
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....ar 2016-17 37.43%, which is not in line with the average industry growth rate. He submitted that the company had substantial amounts of intangibles. The company also had significant expenditure in foreign currency. SPI Technologies trades in certain tangible goods and assumes significant inventory risk as well, which is not similar to the case of the Appellant. 24.1 Peculiar economic circumstance: During the FY 2014-15, the Madras High Court passed the order confirming the amalgamation of SPI Technologies India Private Limited and Laserwords Private Limited, a wholly owned subsidiary of SPI Technologies. 24.2 In this regard, he placed reliance on the decision of this Tribunal in the case of Global E-Business Operations (P.) Ltd v. DCIT [ reported in [2022] 145 taxmann.com 413 (Bangalore - Trib.)], for the assessment year 2016-17. In view of the above, he submitted that SPI Technologies is liable to be excluded from the list of comparables. 25. The ld. D.R. relied on the order of ld. DRP 26. After hearing both the parties, we are of the opinion that this comparable is considered in the case of Global E-Business Operations Pvt. Ltd. cited (supra) wherein the Tribunal has ....
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....final decision of this Court in Pr. CIT v. Aptara Technology (P.) Ltd. [2018] 92 taxmann.com 240 and Pr. CIT v. PTC Software (I) (P.) Ltd. [2019] 101 taxmann.com 117 (Bom.). In both the above decisions this Court has taken a view that merger/amalgamation is an extra ordinary event and would have an impact /effect on the financial results of the company. Thus, in both the aforesaid decisions, this Court upheld the view of the Tribunal that where merger/amalgamation have taken place and it is not a normal event then such a company would cease to be comparable. This of course is subject to the Revenue being able to show that amalgamation/merger did not have any effect of the profitability of the company. This has not been shown by the Revenue either to the Tribunal or before us. Therefore, this issue stands covered by the decision of this Court in Aptara Technology (P.) Ltd.'s case (supra) and PTC Software (I) (P.) Ltd.'s case (supra) in favour of the respondent. This more particularly in view of the absence of the Revenue even attempting to show that the merger and amalgamation that took place in the case of comparable M/s. Keynote Corporate Securities Limited was such that i....
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....ncern and because of these extraordinary events, the margins of said companies should not be included in the final set of comparables. The Pune Bench of Tribunal in Aptara Technologies Pvt. Ltd. v. ACIT (2016) 72 taxmann.com 352 (Pune - Trib) and Cummins Turbo Technologies Ltd. v. DCIT (2017) 79 taxmann.com 260 (Pune - Trib) has held that the said concern cannot be accepted as comparable. The Tribunal in Aptara Technologies Pvt. Ltd. v. ACIT (supra) held as under:- "14. We find that the Tribunal in assessee's own case in assessment year 2008-09 in ITA No. 2235/PN/2012, order dated 02.02.2015 had held that the said concern could not be considered as comparable because of certain extraordinary events. The said ratio was also applied in assessee's own case while benchmarking the international transaction of assessee with its associate enterprises in assessment year 2009-10 in ITA No. 267/PN/2014, order dated 29.04.2015. The Tribunal vide order dated 02.02.2015 had held that the concern Accentia Technologies Ltd. could not be included in the final set of comparables holding as under:- "13. Next, assessee had contended that Accentia Technologies Ltd. ....
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....rranted exclusion of this company as a comparable. We therefore hold that the said concern cannot be considered as a comparable." 15. Further, similar proposition has been laid down by different Benches of Tribunal while deciding the appeals relating to assessment year 2010-11 and it has been held that because of extraordinary events during the year, the concern Accentia Technologies Ltd. was not comparable to the entities engaged in ITES. Following the same parity of reasoning, we hold that Accentia Technologies Ltd. is to be excluded from the final set of comparables." 13. Following the same parity of reasoning as in Aptara Technologies Pvt. Ltd. v. ACIT (supra) and Cummins Turbo Technologies Ltd. v. DCIT (supra), we hold that Accentia Technologies Ltd. cannot be compared as comparable because of extraordinary events of acquisition and amalgamation during the year. Accordingly, we direct the Assessing Officer/TPO to exclude Accentia Technologies Ltd. from final list of comparables." 10. We, place reliance on the afore-stated judicial precedents where there is an emerging consistent view in this regard that if an extraordinary event has taken place by wa....
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....in providing high end Knowledge Process Outsourcing services, which cannot be compared to routine ITeS rendered by the Appellant. The company provides data management, analytics solutions and process outsourcing services, which are not comparable to the services rendered by the Appellant. Eclerx also offers various products to its customers. However, segmental information as regards the varied products are unavailable. Significant intangibles: 29.1 He further submitted that the company is engaged in developing its own intangible assets. Eclerx has invested significantly in the development of its proprietary digital asset called FLUiiD4. Significant marketing expenses. Incurs subcontracting costs. Peculiar economic circumstances: 29.2 He submitted that during the assessment year 2016-17, the company acquired a European based company which significantly contributed to its customers and revenue base. It is submitted that this acquisition is a peculiar economic circumstance, which is bound to have an impact on the margin of the company. In the absence of any reasonably accurate adjustments capable of being made to mitigate the impact, the company ought to be excluded ....
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.... India. Eclerx is a specialist KPO company and also India's first publicly listed KPO company Extraordinary events 6.1 Eclerx has been amalgamated with Agilyst Consulting Private Limited ("ACPL") with effect from 01 April 2015. As per RPT schedule, the services of all employees and other employee benefits of ACPL have been transferred to Eclerx w.e.f 01 April 2015 6.2 The learned TPO in the order has mentioned that as per Annual Report for FY 2016-17, the HC of Bombay approved the scheme of amalgamation between ACPL and Eclerx with effect from the appointed date of April 01, 2015, which became effective from August 22, 2016 and hence, the results for FY 2015-16 are not impacted by such amalgamation 6.3 However, in financials for FY 2016-17, it is mentioned that the HC has sanctioned the scheme of Amalgamation with an appointed date of 01 April 2015. The scheme has been given effect to in the books of accounts of Eclerx w.e.f 01 April 2015, thus affecting the financials for FY 2015-16. Outsourcing/sub-contracting charges and expenses towards sales & marketing services 6.4 The company incurs subcontracting charges and selling ....
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.... 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. It is a fact that this company falls in the category of ITeS and hence, the objection is rejected. 7.2. The Annual report of the comparable mentions that Eclerx is a specialist KPO/BPO (Knowledge and Business Process Outsourcing) company providing critical business operations services to more than 301 global Fortune 500 clients, including many of the world's leading financial services firms, online retail and distributors, interactive media, luxury brands and entertainment, high tech and industrial manufacturing, travel and leisure and software vendors, through operational support, data management and analytics solutions. Thus, it's not purely a KPO company. 8. We have heard the rival submissions and perused the materials available on record. This comparable has been considered in the case of Swiss Re Global cited (supra), wherein it was held as under: "29. We have heard both the parties on the issue. This company has also been considered as not comparab....
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....astructure management services which services are comparable to the services rendered by the Appellant. Business process outsourcing services provides solution for productive legal process outsourcing, content management services and infrastructure management services. IT Infrastructure management services provides IT Infrastructure solutions, maintenance solutions, security solutions, other IT Solutions and services. Further, it is submitted that the company passes all filters applied by the TPO. It is submitted that the exclusion of this company on the sole ground that it does not feature in the search matrix is whole erroneous. Reliance in this regard is placed on Prism Networks Private Limited v. ACIT (Order dated 11.02.2022 passed by this Hon'ble Tribunal in IT(TP)A No. 349/Bang/2021). Therefore, he submitted that the company ought to be included in the final list of comparables. 32.2 The ld. D.R. relied on the order of ld. DRP 33. After hearing both the parties, we are of the opinion that this issue came for consideration in the case of M/s. Prism Networks Pvt. Ltd. Vs. ACIT in IT(TP)A No. 349/Bang/2021 dated 11.2.2022 wherein the Tribunal held as under: ....
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....works Pvt. Ltd. Cited (supra) in para 18 of that order, which is reproduced in above para, this comparable has been excluded only on the reason that it does not feature in the search matrix. In our opinion, it is appropriate to remit this Crystal Voxx Ltd. issue to the file of ld TPO/AO for conducting fresh TP study and decide the issue accordingly. iii. Surevin BPO Services Ltd: 36. The ld. A.R. submitted that this company is engaged in providing BPO services (outbound & inbound call center services), digital and social marketing, skill development & training, etc which are akin to the services provided by the Appellant. He submitted that the exclusion of this company on the sole ground that it does not feature in the search matrix is whole erroneous. In this regard, he placed reliance on Prism Networks Private Limited v. ACIT (Order dated 11.02.2022 passed by this Hon'ble Tribunal in IT(TP)A No. 349/Bang/2021). Therefore, he submitted that the company ought to be included in the final list of comparables. 36.1 The ld. D.R. relied on the order of ld. DRP 37. After hearing both the parties, we are of the opinion that as discussed in earlier para, this comparable vi....
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....S functions performed by the Appellant, and by rejecting the TNMM method and adopting an erroneous method as the most appropriate method. 40.2 He submitted a brief of the services rendered by the Appellant which are set out as under: a. Description of overall Value Chain of VMware Group for sale of products ● VMware US is responsible for managing the company's global sales and marketing efforts for all VMware product offerings. The most important part of the marketing process is the development of VMware's global marketing strategy, product focus and identification of customer/market segments by the global marketing team. The US global marketing team along with the APAC and EMEA regional marketing teams are responsible for developing marketing policies, programs, activities related to market research, product/brand management, product development and pricing which are designed to increase products sales growth and expand market share. ● The most important part of the sales process is development of central pricing guidelines aimed at optimizing sales and the management of relationships with channel partners to ensure on time deliver....
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.... it is engaged in rendering only support services for managing and marketing the products of VMware in India. The Appellant is not engaged in distribution functions as alleged by the TPO as VMware Group undertakes sales through authorized Distributors and Partners (collectively referred to a "VMware Partner Network" or "Channel Partners"). The channel partners purchase software licenses and software related services from VMware Group for resale to end-user customers directly or via resellers. Channel partners are also responsible for maintaining primary relationship with the end-user customers. The corresponding profits related to this distribution function in the value chain are captured by these third party distributors and/or Channel partners. The diagram below represents a typical route to market for VMware products to end-user: Hence, he submitted that the Appellant is not engaged in distribution activities but only provides the following services: ● General administrative, marketing, and promotional services relating to facilitating of sale process for Channel Partners, providing an understanding of the VMware products to customers, etc. ● ....
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....r overall facilitation and supervision of the imparting of training programme to ensure that the training is imparted based on laid-down standards. ● In order to avail the services from the channel/training partners, Appellant would raise a purchase order on the channel/training partners. Upon completion of the services, the channel/training partners would raise an invoice on the Appellant. ● In case of direct sale by VIL, the training requirement is outsourced to the Appellant. Based on the availability of resources, the training would be imparted by the Appellant to the customers of VIL based in India. In case of non-availability of the resources, the Appellant sub-contracts the work to the channel/training partners. ● The entire cost incurred by VMware India towards training services provided in-house or through sub-contracting to channel/training partners forms part of the cost base for these training services, and is remunerated by VIL with requisite mark-up in accordance with service arrangement. Typical process 40.7 The ld. A.R. submitted the step-by-step truncation flow between the customers, channel partners, VIL and Appel....
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....d applied by the TPO to artificially allocate revenue to the Appellant cannot even be construed as 'other method' as contemplated under Rule 10AB of the Rules. The ad hoc approach adopted by the TPO does not consider any uncontrolled transactions as prescribed by law. Therefore, it is submitted that the approach adopted the TPO is contrary to the provisions of the Act and unsustainable. ● The TPO has used certain data from the financials of VIL and VMware Group (consolidated financials) to derive certain percentages which have been relied upon to compute the adjustment under MSS segment of the company. The Appellant submits that the said approach is erroneous for the following reasons: a. This methodology has altogether disregarded the role of Partner Channel Network (third party Channel Partners/ Distributors) and VMware Group's support to India territory sales in the supply chain thereby assigning profits related to distributions to the Appellant. b. The TPO has not appreciated that Appellant does not make / facilitate any sales to third party customers on behalf of VMware Group and is merely involved in rendering certain marketing support....
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....and hence dismissed as not pressed. 45. Ground Nos. 23 & 24 of the assessee's appeal are reproduced as under: Disallowance of deduction under section 80G of the Act 23. That on the facts and in circumstances of the case and in law, the Learned AO and the Hon'ble DRP erred in disallowing the sum of INR 1, 13, 52, 360 claimed by the Appellant under section 80G of the Act. 24. That on the facts and in circumstances of the case and in law, the Learned AO and the Hon'ble DRP erred in not appreciating the fact that there is no restriction specified under the Act to claim deduction under Section 80G of the Act made out of contributions towards Corporate Social Responsibility ('CSR') provided the payments are made to eligible entities as listed in Section 80G of the Act. 45.1 The ld. A.R. submitted that during the year under consideration, the Appellant had contributed an amount of Rs. 2, 27, 69, 309/- to various charitable organizations towards its CSR obligation. The said amount was added back to the taxable income in terms of the provisions of the Act and since the donations were made to certain institutions which were eligible for deduction un....
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....Learned AO and the Hon'ble DRP erred in making a disallowance of the sum of INR 4, 59, 47, 571 incurred towards purchase of computer peripherals debited in the Profit and Loss account under section 37 of the Act as capital expenditure. 26. That on the facts and in circumstances of the case and in law, the Learned AO and the Hon'ble DRP failed to appreciate that the expenditure towards computer peripherals which mainly comprises of purchase of headsets and speakers do not provide benefit of an enduring nature and hence, are not capital in nature. 27. That, without prejudice, on the facts and in circumstances of the case and in law, the Learned AO and the Hon'ble DRP failed to acknowledge and appreciate that computer peripherals cannot be used independently and hence, depreciation should have been allowed at a rate of 60% as prescribed under the Act both for AY 2017-18 as well as for AY 2016-17, instead of the rate of 15% as allowed by the Learned AO. 47.1 The ld. A.R. submitted that during the assessment year 2017- 18, the Appellant had incurred an amount of Rs. 4, 59, 47, 571/- towards purchase of Computer peripherals and accessories, which it claimed as a....
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....ng depreciation under section 32 of the Act amounting to INR 84, 805 on purchase of monitors and desktops, which was disallowed in the AY 2009-10, AY 2010-11 and AY 2011-12, treating it as capital in nature. 50.1 The ld. A.R. submitted that during the assessment proceedings for assessment years 2009-10, 2010-11 and 2011-12, purchase of monitors and desktops expensed by the Appellant in the profit and loss account under the head "Repairs and Maintenance" totalling to Rs. 2, 18, 91, 676/- were disallowed treating it as capital in nature. Accordingly, depreciation on such monitors and desktops was claimed by the Appellant. The said claim was allowed by this Hon'ble Tribunal in Appellant's own case for assessment year 2009-10. For assessment years 2010-11 and 2011-12, the Commissioner of Income-Tax (Appeals), Bangalore had relied on the order of this Tribunal and upheld the adjustment for the said years. Further, the aforementioned decision has not been contested before the higher appellate authorities. Subsequent to orders of the appellate authorities, the office of the assessing officer had issued the order giving effect factoring the above orders. 50.2 In this regard, he ....
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....s' Provident Fund and Miscellaneous provisions Act, 1952 under Section 36(1)(va) of the Act. In the draft assessment order, the Assessing Officer upheld the said disallowance without providing any opportunity to the Appellant to submit its contentions against such disallowance. Upon obtaining a remand report and upon accepting the contentions of the Appellant, the DRP directed deletion of the disallowance. In the final assessment order, an amount of Rs. 54, 064/- only was considered as the disallowance under Section 36(1)(va) of the Act. However, the CPC while computing the assessed income has considered the entire disallowance of Rs. 51, 49, 036/- and the disallowance of Rs. 54, 064/- was also considered once again while computing the assessed income resulting in double disallowance to the extent of Rs. 54, 064/-. In this regard, the ld. A.R. prayed that the Assessing Officer may be directed to give effect to the directions of the DRP by deleting the disallowance. 52.3 The ld. D.R. relied on the orders of ld. DRP. 53. After hearing both the parties, we remit this issue to the file of ld TPO/AO for fresh consideration after giving an opportunity of hearing....
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.... the order of ld. DRP. 55. After hearing both the parties, we remit this issue to the file of ld. TPO/AO for verification and decide accordingly. 56. Ground Nos. 34 & 35 of the assessee's appeal are reproduced as under: Disallowance under section 40(a)(ia) of the Act 34. That on the facts and in circumstances of the case and in law, the Learned AO erred in incorporating the addition of INR 1, 56, 032 under section 40(a)(ia) of the Act as made in the intimation issued under section 143(1) of the Act, though the same has already been disallowed under section 37 of the Act suo moto by the Appellant in its return of income. 35. That the Learned AO erred in making the addition for the first time in the final assessment order, without proposing the same in the draft assessment order. 56.1 The ld. A.R. submitted that the Appellant had paid an amount of Rs. 5, 20, 107/- towards professional fees in connection with the amalgamation. Since the said amount was in the nature of capital expenditure, the Appellant suo moto disallowed the entire expense under Section 37 of the Act. In this regard, he submitted that the in view of the Appellant already....
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....tead of INR 61, 71, 170 claimed by the Appellant in the return of income. 60.1 The ld. A.R. for the assessee submitted that the Appellant had claimed Rs. 81, 25, 00, 000/- in the return of income towards credit of advance tax paid. However, the Assessing Officer, while passing the Final Assessment Order has erroneously allowed Rs. 77, 00, 00, 000/- instead of Rs. 81, 25, 00, 000/-. Therefore, he prayed that the Assessing Officer be directed to allow the entire amount of Rs. 81, 25, 00, 000/-. In respect of credit of taxes deducted at source, the Assessing Officer has erroneously allowed Rs. 59, 39, 098/- instead of Rs. 61, 71, 170/-. Therefore, he requested that the Assessing Officer be directed to allow an amount of Rs. 61, 71, 170/- 60.2 The ld. D.R. relied on the order of ld. DRP. 61. After hearing both the parties, we remit this issue to the file of ld TPO/AO with direction to give correct advance and TDS credit. Ordered accordingly. 62. Ground Nos. 39 to 41 of the assessee are reproduced as under: Others (Interest and penalty) 39. That the learned AO has erred in levying interest under section 234B of the Ac....