TaxTMI 
TaxTMI 
2025 (8) TMI 884
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.... principle envisaged under the Act and in doing so, have grossly erred in not considering Staffing Augmentation Activity-Domestic as a TNMM comparable in addition to the three comparables considered in page 60 of 65 of TPO order. 2. That on the facts and circumstances of the case and in law, the Ld. AO/Ld. TPO/DRP has erred in enhancing the income of Appellant by Rs. 2,90,89,437 while holding that the Appellant's international transaction pertaining to provision of Staff Augmentation Service ('SAs')- Export, to its Associated Enterprises ('AE'), even after reconstruction of segment by TPO, does not satisfy the arm's length principle envisaged under the Act and in doing so, have grossly erred in including certain companies in the final comparable set that are not comparable to the Appellant in terms of functions performed, assets employed and risks assumed and proceeding to determining the arms' length price based on three external comparables which are not in the same line of business and are not having the same commercial model. 3. That on the facts and circumstances of the case and in law, the Ld. AO/Ld. TPO/DRP has erred in enhancing the....
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..... That on the facts and circumstances of the case and in law, the Ld. AO/Ld. TPO/ DRP has erred in enhancing the income of Appellant by Rs. 2,90,89,437 while holding that the Appellant's international transaction pertaining to provision of Staff Augmentation Service ('SAs')- Export, to its Associated Enterprises ('AE'), even after reconstruction of segment by TPO, does not satisfy the arm's length principle envisaged under the Act and in doing so, have grossly erred in ignoring the internal comparability i.e. OP/TC earned by the Appellant from provision of staff augmentation services to a domestic third party." 2.1 Assessee has also raised following additional ground : "Additional Ground # 1 (which is Ground No 8 in the Grounds of Appeal filed): 8. That on the facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO/ DRP failed to consider the principle of Transfer pricing as enshrined in the following decisions: a. ITAT HYDERABAD- APPLABS TECHNOLOGY PVT LTD VS DCIT ITA NO 94/HYD/2013 in pages relying on the ITAT DELHI in the case of GLOBAL VANTAGE PVT LTD VS DCIT (ITA NO: 2763 AND 2764/DEL/2009) that the adjustments (on ....
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....rm's Length Price (ALP). Ld. TPO examined the TPSR and after considering the submissions of the assessee as well as the comparables introduced by TPO, final set of comparables for recruitment services, export segment are as follows : Sl. No. Name of the comparable Weighted Average Margin 1 Head Field Solutions Pvt. Ltd. 2.20% 2 Husys Consulting Ltd. 2.19% 3 Interactive Manpower Solution Pvt. Ltd. 38.88% 15.09% 4. Now since OP/TC from Staff Augmentation services determined by ld. TPO came to 15.09% and the OP/TC of the assessee calculated by ld. TPO at 5.46% fall outside the Arm's Length range of the comparable companied proposed by ld. TPO, therefore, Transfer Pricing adjustment of Rs. 2,90,89,437/- was proposed to the total income of the assessee. With regard to the Software development service segment segmental OP/TC reported by the assessee at 16.79% was much better than the OP/TC as per the Transfer Pricing Study Report (TPSR) furnished by the assessee having median 7.05%, no adjustment was proposed by the assessee in the TPSR. Further, ld. TPO based on the set of comparables introduced by it and allocating expense a....
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....considered a comparable. 7.2 The Appellant has preferred an appeal to the Hon'ble ITAT against the addition carried out by the Ld. AO and confirmed by the DRP and raised grounds. In specific, the Appellant requests the Hon'ble ITAT to consider and adjudicate on the below grounds of appeal: Ground 3.4 3. That on the facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO/ DRP has erred in enhancing the income of Appellant by Rs. 2,90,89,437 while holding that the Appellant's international transaction pertaining to provision of Staff Augmentation Service (''SAs')- Export, to its Associated Enterprises ('AE'), even after reconstruction of segment by TPO, does not satisfy the arm's length principle envisaged under the Act and in doing so, have grossly erred in: 3.4. not considering Staffing Augmentation Activity- Domestic as a TNMM comparable in addition to the three comparables considered in page 60 of 65 of TPO order 7.3 The Appellant wishes to submit before your Honour that the Appellant also rendered similar staff augmentation services to unrelated third parties during AY 2021-22. In view of the above and placing reliance on ....
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....counting standards and practices for the internal comparable and for the controlled transaction. In addition, access to information on internal comparables may be both more complete and less costly." 7.6 From the above, it is clear that the internal comparable data (wherever available) should be preferred over the external comparable data for the application of TNMM. Since reliable and accurate information for application of internal TNMM is available with the Appellant, such internal data should only be used for the purpose of TNMM analysis. The Appellant submits that the details of the margin earned by Spectraforce India from services rendered to the Associated Enterprise vis-à-vis services rendered domestically to third parties is available and mentioned in the TP Order (Please refer Page 42 to Page 48 of the Paper book) ( Page 34 to Page 41 of the TP Order) 7.7 The Appellant submits that during the course of the TP assessment proceedings, the Company has specifically raised the argument that Internal TNMM be considered, which has been ignored on presumptions by the Ld. TPO. (Please refer Page 65 to Page 67 of the Paper book) ( Page 58 to Page 60 of the ....
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....r Solution Private Limited 74999 (See TPO ORDER 58 OF 69)- As per National Industrial Classification - Economic Activities publication, this NIC code 74999 falls under Division 74 OTHER PROFESSIONAL, SCIENTIFIC AND TECHNICAL ACTIVITIES. APPELLANT- Spectraforce Technologies (India) Private Limited 7830 (AS PER MGT-9 ANNUAL REPORT OF THE COMPANY- see Paper Book Page 80). This NIC code 7830 falls under DIVISION 78 EMPLOYMENT ACTIVITES. c. The ITC code of Interactive Manpower Solutions Private Limited -page 481 of Paper Book 2 is 99851110 described as EXECUTIVE / RETAINED SEARCH SERVICES while the ITC Code of the Appellant- see page 96 of Paper Book 1- is 99851210- described as CONTRACT STAFFING SERVICES. Both are two different level of business and are not comparable. 7.9 The Appellant submits that the Ld. TPO has considered Interactive Manpower Solution Private Limited ('Interactive') as a comparable in respect to the Staff Augmentation services segment. The same is not comparable to the Appellant on account of the fact that Interactive and Appellant are not functionally similar and in different line of business: Judicial Precedence ....
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....Where the application of the most appropriate method (or, in relevant circumstances, of more than one method, see paragraph 2.12), produces arrange of figures, a substantial deviation among points in that range may indicate that the data used in establishing some of the points may not beas reliable as the data used to establish the other points in the range or that the deviation may result from features of the comparable data that required adjustments. In such cases, further analysis of those points may be necessary to evaluate their suitability for inclusion in any arm's length range. ........ ........ 3.65. Generally speaking, a loss-making uncontrolled transaction should trigger further investigation in order to establish whether or not it can be a comparable. Circumstances in which loss-making transactions/ enterprises should be excluded from the list of comparables include cases where losses do not reflect normal business conditions, and where the losses incurred by third parties reflect a level of risks that is not comparable to the one assumed by the taxpayer in its controlled transactions. Loss-making comparables that satisfy the comparability ana....
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....tated that itis reiterated that alternate adjustment or Rs. 1,15,06,330 is made only if the assessee disputes allocation of the expenses at appellate stage and the contention is being accepted by the respective appellate authority. Submitted that no dispute on allocation of expenses, as done by TPO, has been made by the Appellant and therefore, the addition is infructuous. 7.15 WITHOUT PREJUDICE TO OUR SUBMISSIONS RELATING TO ALP DETERMINATION OF STAFF AUGMENTATION SERVICES IN THE EARLIER PART, WE SUBMIT AS UNDER WITH RESPECT TO THE ALP IN RESPECT OF SOFTWARE DEVELOPMENT SERVICES SEGMENT. 7.16 The Ld. TPO while analysing the Arm's Length Price of the Appellant, had made an alternate adjustment (some sort of conditional adjustment) of Rs. 1,15,06330/-, in respect of the Appellant's International Transactions in its SOFTWARE SEGMENT- 7.17 The Ld. TPO in his order dated 29th October 2023- page 64 of 65 para 20(Please refer Page 71 of the Paper Book)- stated as follows- 20. Thus substantial adjustment of Rs. 2,90,89,437/- is made to the international transaction relating to Recruitment / Staffing Augmentation services. As a result, income of assessee....
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....on of the Appellant's financial performance, leading to a correct determination of the arm's length price. 7.22 C.1. Vide Objection 3, the Appellant raised objections to certain companies taken as comparables in arriving at the ALP in respect of Software Development Services. 7.23 Ld.DRP in page 153 of 160 of the DRP directions, while dealing with the Alternate Adjustment to be considered directed as follows- Panel Notes that this (Rs.1,15,06,330/) is an alternate adjustment proposed by the Transfer Pricing Officer. Accordingly, the primary adjustment pertains to the Human Resource and Staff Augmentation Services Segment (SAS). The adjustment in this segment is to be examined only if the adjustment in SAS segment is rejected, leading to reduction in the Profit Level Indicator(PLI) of the applicant. 7.24 C.2. The above direction of DRP, in our view, is an enhancement without providing an opportunity to the Appellant and hence liable to be struck down. 7.25 D. The Ld. AO in his Final Order, passed on 18/10/2024, under sec. 143(3) r.w.s. 144C(13) did not follow the above revised directions of DRP and held (at page 5 of 7) as follows- ....
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....upporting the order of ld. DRP. 9. We have heard the rival contentions and perused the record placed before us. We will first take up the substantial upward adjustment made by ld. Assessing Officer for the Staff Augmentation services proved by the assessee to its AE based on the calculation of ALP by the ld. TPO. Ld. Counsel for the assessee has made multifold arguments challenging the said adjustment and the same are as follows : (a) That ld. DRP erred in accepting the ld. TPOs finding rejecting the internal TNMM even when the assessee provides similar type of services to unrelated third parties in the domestic market. (b) That ld. AO erred in considering Interactive Manpower Solution Pvt. Ltd. (in short IMSPL) as a comparable for the purpose of computing ALP disregarding the fact that the nature of activity of "IMPSL" is different and also the NIC Codes and ITC Codes of IMSPL are different than the assessee. (c) IMSPL should not be included as comparable because the profit margin of IMSPL are much higher to that of the assessee and other comparables considered by ld. TPO. 10. So far as the contention of ld. Counsel for the assessee on application ....
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....parties (d) Expenditure incurred for Advertisement and Promotional services. 12. It is further stated that so far as assessee is concerned no such type of expenses including royalty, market support fees, advertisement have been incurred which shows that IMSPL is an Entrepreneurial company whereas the assessee is a Risk Related company wherein significant risks are undertaken by AE and is characterized as a routine service entity. It is further stated from assessee's side that comparables are not in the same line of business and are different in functions and are not having the commercial model. The assessee supports the contract staffing service department of the AEs by undertaking part of the statement of working undertaken by AEs with the ultimate clients. Further, comparative chart showing the nature of services rendered by the assessee as well as the IMSPL has been placed in the paper book at pages 453 to 454 which reads as under : 13. On going through the above details of services, we note that there are major differences between nature of services rendered by both the assessee and IMSPL. Assessee is working for recruitment of temporary workers for the clients b....
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....onally different as it is engaged in both rendering software services & developing software products. The Company owns substantial intangibles and cannot be compared to the assessee. The Company has substantial RPT transaction for FY 13-14 (79.45%). It was further submitted that despite directions by DRP to exclude FY 13-14 for PLI computation, the TPO has considered all the 3 years. Therefore this company has to be excluded from the comparables list. 13.1 The ld. DR relied on the orders of lower authorities. 13.2 We have heard both the sides and perused the material on record. On going through the submissions made before the lower authorities which is placed at page 1039, para 6.103, the assessee submitted as under:- "The Assessee submits that this company is functionally different as it is engaged in both rendering software services and developing software products. Further, it provides wide range of services such as Application Development, Application Migration, Application Maintenance, Oracle Application, Microsoft Dynamics, Data Warehousing, EI & EDI Services, Consulting Services, Healthcare BPO. These are evident from company's website which is....
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....eard the rival contentions and perused the material on record. We notice that the coordinate bench in the case of NTT Data FA Insurance Systems (India) (P.) Ltd. (supra) has considered the issue of exclusion of Inteq Software Pvt. Ltd. and Infobeans Technologies Ltd. and held as under:- '18. We have heard the rival submissions and perused the materials available on record. In our opinion, this comparable was considered by the Hyderabad Tribunal in the case of ADP Pvt. Ltd. in ITA No. 227 & 228/Hyd/2021 dated 3-2-2022 at para 7 page 3678 to 3680 wherein held as under:- xxxxxx xxxxxx 21. We have heard the rival submissions and perused the materials available on record. This comparable has considered in the case of Global Logic India Pvt. Ltd. v. DCIT (2022) 134 Taxmann.com 35 for the assessment year 2016-17, wherein held as under:- 46. "The taxpayer sought exclusion of Inteq again on account of functional dissimilarity being into providing outsourced product development services and Healthcare BPO services to its customers as per website extracted at pages 83 to 85 of the appeal memo set. It being a private limited company its financials are no....
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....The above observations of change in NIC Codes, ITC Codes, as well as abnormal profit margin of IMSPL remain unrebutted by ld. Departmental Representative. 18. We therefore respectfully following the decisions referred herein above and also considering the facts of the instant case, find that since the NIC Codes, ITC Codes of the assessee company is different to that of IMSPL, profit margin of IMSPL are abnormally high as compared to the other comparables selected by ld. TPO as well as the profit margin of the assessee and also the nature of services eventhough apparently looking similar but as discussed in the preceding paragraphs they are different therefore they cannot be functionally comparable. We are therefore are of the considered view that the comparable namely Interactive Manpower Solution Pvt. Ltd. deserves to be excluded from the list of final comparables. Ld. AO is accordingly directed to give effect to the same and recalculate the Weighted Average Margin after excluding the IMSPL from the list of comparables, then calculate the ALP of the transaction with AE of Staff Augmentation services in case the segmental OP/TC of the assessee is outside the range. Relevant grou....
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....n of 27.05% as per comparables selected by ld. TPO assuming that if the assessee is able to justify the allocation of expenses and segmental profitability as given in TP study report. Further, concluding the proceedings, ld. TPO while calculating the alternate adjustment of Rs. 1,15,06,330/- adopting the segmental Operating Profit margin declared by the assessee at 16.79% as against the ALP median at 27.05% proposed adjustment of Rs. 1,15,06,330/-. Ld. TPO reiterated that alternate adjustment is made only if the assessee disputes allocation of expenses at appellate stage and the contention is being accepted by the respective appellate authority. Thereafter, when the matter travelled before the ld. DRP, on one hand ld. DRP has dealt with the comparables included by the ld. TPO for calculating the Operating Profit margin from Software development services but then on page 153 of the DRP order ld. DRP while dealing with alternate adjustment to be considered gave following directions : "Alternate Adjustment to be considered: Panel notes that this is an alternate adjustment proposed by the Transfer Pricing Officer. Accordingly, the primary adjustment pertains to the Hu....
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....Consulting Ltd. (4.19%) is to be considered and thereafter, ld. AO shall calculate the ALP of the international transaction carried out by the assessee with its AE for the Staff Augmentation services. Needless to mention that reasonable opportunity of hearing will be afforded to the assessee. 24. In the result, appeal of the assessee is partly allowed for statistical purposes as per terms indicated hereinabove. Order pronounced on this 18th day of July, 2025. ============= Document 1 The Assessee has tabulated below the differences in the services rendered by the Assessee to its associated enterprises vis-Ã -vis IMSPL. 21 S.No Particulars Assessce IMSPL 1 Services rendered Assessee engages in the recruitment of temporary Workers for the clients of associated enterprise based on specific job requirements. The Associated Enterprise receives the requirement from their clients, which is passed on to the recruitment team in the company. The recruitment team in India sources the relevant profiles of the people working in the USA, from various sources. A three-month training is given to all new resources who join the recruitment team. Before a resource starts workin....