TaxTMI 
TaxTMI 
2026 (9) TMI 592
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....in both captioned cross-appeals are common, therefore, they are taken together and decided by a common order. 3. First we take up the assessee's appeal for Assessment Year 2007-08 in ITA No.4306/Mum/2012. ITA No.4306/Mum/2012 [Assessment Year 2007-08] [Assessee's appeal] 4. Brief facts of the case are that the assessee was earlier known as RBS Business Services Ltd. and is engaged in rendering back office support services, software services and knowledge process outsourcing services ("KPO") to various entities within its Group ("NatWest Group"). During the year, the assessee has entered into following international transactions with its Associated Enterprises ("AEs"):- 5. The return of income was filed on 31.10.2007, declaring total income of INR 5,25,59,617/- under the normal provisions of the Act and book profit of INR 4,54,03,426/- was declared u/s. 115JB of the Act. The case was selected for scrutiny and the matter was referred to Transfer Pricing Officer ("TPO") for determination of the Arm's Length Price ("ALP") of international transactions carried out by the assessee with its AE's. The TPO in terms of the order dated 29.10.2010 passed u/s. 92CA(3) had made fo....
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.... -15, Mumbai ('CIT-A') erred on facts and in law in upholding the addition in relation to international transaction of back-office support services made by the Assessing Officer i.e. Deputy Commissioner of Income-tax, Range 3(3), Mumbai ('AO') by relying on the order of the Additional Commissioner of Income-tax I(1) ('TPO') to the Appellant's total income based on the provisions of Chapter X of the Income-tax Act, 1961 ('the Act'). 1.2 The learned CIT-A erred in confirming the erroneous action of the TPO who arbitrarily rejected/disregarded the detailed and methodical benchmarking analysis and comparable companies selected by the Appellant without appreciating the fact that such selection was based on the contemporaneous data and the transfer pricing study report prepared and maintained as per section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('the Rules'). 1.3 The learned CIT-A erred on facts and in law in upholding the action of the learned TPO of applying a standard search conducted by the tax office for Information Technology enabled Companies ('ITES') companies without taking into consi....
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.... facts of the case and in law, the learned CIT-A erred in confirming the action of the AO in including the unbilled revenue of Rs. 7,25,14,158 to the total turnover of the Appellant for the purpose of calculating deduction under section 10A of the Act while excluding the same from the export turnover. 3.2. Without prejudice to the above, based on the facts of the case and in law, the learned CIT-A erred in not maintaining parity and including the unbilled revenue in the export turnover also. Ground III-Levy of interest under Section 234B of the Act 4.1. The Appellant submits that after giving relief on the grounds raised in this appeal, the interest levied in the impugned order would undergo a change. 4.2 The Appellant, therefore, prays to grant relief in respect of consequently reduce the interest levied under Section 234B of the Act. Ground IV - Penalty Proceedings under section 271(1)(c) of the Act 5.1 On the facts and in the circumstances of the case, the learned AO has erred in initiating penalty proceedings under section 271(1)(c) of the Act. 5.2 The Appellant prays that the penalty proceedings be dropped in the m....
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....analysis conducted by the learned TPO is liable to be quashed. 1.4 The learned CIT-A erred on facts and in law in confirming the action of the learned TPO of obtaining data which was not available in public domain by using his special powers u/s. 133(6) of the Act and selectively applying such data for benchmarking international transactions of the Appellant. 1.5 The learned CIT-A erred on facts and in law in confirming the action of the learned TPO of not allowing adjustments in accordance with the provisions of Rule 10B(1)(e)(iii) of the Rules to account for differences in the functional and risk profiles of the international transactions and the alleged comparable uncontrolled transactions declared by learned AO/TPO. 1.6 The learned CIT-A erred on facts and in law in arbitrarily rejecting the contention of the Appellant of computing the margin of alleged comparable companies based on multiple year financial data. 1.7 The learned CIT-A erred in facts and in law in disregarding para 5.5 of Circular 14/2001 which clarifies that the basic intention underlying the new transfer pricing regulations is to prevent shifting out of profits by ma....
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....ubmit such statements, documents and papers as may be considered necessary either at or before the hearing of this appeal as per law." 9. Before us, Ground of appeal No.1 raised by the assessee with respect to adjustment made in the transactions of back office support service. In support, ld.AR submits that the assessee has selected seven [07] comparables for benchmarking international transactions with respect to back office support services and worked out the margin @ 13.50% which is within [+/-] 5% of the arithmetic mean declared by the assessee. Therefore, no adjustment was made by the assessee and transactions were considered at ALP. The TPO though accepted the method applied by the assessee for determination of the ALP however, has modified/inserted new filters and further, the TPO has rejected two [02] comparables selected by the assessee and inserted twenty [20] new comparables and made the adjustment of INR 43,17,09,802/-. In first appeal, Ld. CIT(A) has directed to exclude seven [07] comparables inserted by the TPO and thereafter, based on the remaining eighteen [18] comparables out of twenty five [25] selected by TPO, the mean margin was computed at 32.60% and accordi....
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....d BPO and KPO services where no specific specialized engineering services are required and therefore, the profit element in the comparable company of Mold-Tek Technologies Ltd. is very high. Further, during the year under appeal, there was an extraordinary event of amalgamation which was not considered and therefore, this company deserves to be excluded. For this, Ld.AR drew our attention to page 13 of the Annual Report of the company wherein there was a reference of merger of the company and further proposal was made for the demerger. He further drew our attention to the Annual Report wherein the company has started KPO division where engineering services were provided to high rise buildings for clients in US and Canada which has resulted into high profits. Ld.AR submits that this is not the case of the assessee and therefore, the company being functionally dissimilar and also having extraordinary event, the same should be excluded. He further submits that under similar circumstances, the said company was excluded by the Tribunal from the final set of comparables in the case of Hewit Associates (India) P. Ltd. vs ACIT in ITA No.5736/Del/2011, copy of the same is placed at page 92 ....
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.... effective graphic design representation and creating dynamic and graphic rich web applications from IT specs, design prints etc. Keeping in view this information available in the annual report of Mold-Tek as well on its website, we are of the view that the said company is mainly involved in providing high-end services to its clients involving higher special knowledge and domain expertise in the field and the same cannot be taken as comparable to the assessee company which is mainly involved in providing low-end services." [Emphasis supplied] 25.3 Upon consideration of the submissions made by the assessee, material available on record and the decision of the Special Bench of Tribunal in Maersk Global Centre (India) Private Limited (supra), we arrive at a conclusion that this company is not a suitable comparable to the assessee. Hence, we direct the Ld. TPO/AO to exclude this company from the final list of comparable companies." 17. Thus, by respectfully following the aforesaid judgment of Co-ordinate Bench of the Tribunal (supra) and considering the fact that the assessee is not providing structural engineering services therefore, this company is not suitable comparable....
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....gly, we direct the AO/TPO to exclude these companies from the final set of comparables. [4] Accentia Technologies Ltd. 20. This company was included by the TPO by making following observations:- "The company is in healthcare receivable management (page 16, segment information AS 17 item No.19 of Annual Report. Even the assessee is in similar business, as detailed earlier in this order). Majority of the income is generated from medical transcription billing and coding such this company is mainly into ITeS and accordingly comparable. Further it is not coming out of the annual report that the company is into any kind of outsourcing. Accordingly, the appellant's contention in respect of this company as not being comparable and should be excluded from the set of comparables for benchmarking is not found to be acceptable." 21. The assessee claimed that the company has failed in IT enables services filter of 75% applied by the TPO as it has revenue form medical transcription of 57.70%; billing and coding of 9.50% and software devilment and implementation of 32.79%. Therefore, its revenue from ITeS services are 67.2% only which is less than 75%. Fu....
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....comparable. [5]. HCL Comnet Systems & Services Ltd. 24. The TPO has added this comparable by making following observations:- "In the business akin to assessee's business being ITES. Abnormal profitability evens out in a large sample." 25. Ld. CIT(A) has confirmed the action of TPO by observing as under:- "The company is functionally comparable. Related party transaction upto 25% has been-considered to be acceptable for the comparability and benchmarking. Accordingly at the first place the transaction with even related party which is not associated enterprises within the meaning of section 92A cannot be regarded as having any influence on the transaction irrespective of the percentage of related party transaction. It is important to distinguish between a related party and associated enterprises. The related party could or could not be associated enterprises. It is only when there is transaction with the associated enterprises that such transaction cannot be considered as uncontrolled transaction and not otherwise. It is also the fact that there would hardly be any enterprises available which would not have related party transaction. The transactions ....
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....llowing the aforesaid judgments, we hold that this company is functionally dissimilar and direct the AO/TPO to exclude this company from the final set of comparable. [6]. Informed Technologies India Ltd. 28. TPO has included this company by observing that the business is akin to assessee's business which fact was confirmed by ld. CIT(A). The contention of the assessee is that said company has higher business promotion expenses and abnormal margins. Further, the company is mainly engaged in the business of collecting and analyzing data on financial fundamentals, corporate governance, director/executive compensation and capital markets which is high-end services. Further, the turnover of both the companies is dissimilar where the company has turnover of INR 4.08 crores as against the company's back office support services where the assessee has turnover of around INR 284 crores. Further, in the case of Hewit Associates (India) P. Ltd. (supra) and DCIT vs Morgan Stanley Advantage Services Pvt. Ltd. in ITA No.4406 & 4479/Mum/2012 for AY 2007-08, this company was held as not a valid comparable due to abnormal margins and significant fluctuations in the margins of profits. ....
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....]. Asit C.Mehta Financial Services Ltd. 32. It is observed that the company is functionally dissimilar and TPO himself in subsequent AY has excluded this company from the final set of comparable on account of functionally dissimilar. Thus, by considering these facts, we direct TPO/AO to exclude this company as final set of comparables. [9]. Genesys International Corporation Ltd. 33. TPO has included this company as the business akin to IT enable services and entity level all things even out in a large sample. Ld.CIT(A) confirmed the action of AO/TPO. The contention of the assessee is that company is not functionally comparable as it is engaged in providing GIS mapping services comprising of remote sensing, photogrammertry, cartography, data conversion and other related computer based services. Further, during the year under appeal, there was extraordinary event of demerger of engineering information division which is evident from the Annual Report of the company. Further, the company has intangible assets @ 39.73% of the assets. On the careful consideration of the facts, it is observed that there was an extraordinary event of demerger and out of total assets, it has ....
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....ent of software products and outsourced works third party vendors. On careful consideration of the facts, we find that ld. CIT(A) has dealt with the objection of the assessee elaborately and after considering the same, held it has a valid comparable. We find that the reasoning given by ld. CIT(A) is reasoned one and therefore, we hold that AO/TPO has rightly included this company in the final set of comparable. 38. Now, coming to the argument of the assessee that working capital adjustment was not given. Considering the facts of the case, the AO/TPO is directed to allow working capital adjustment to the assessee. Assessee is also directed to file all the necessary working of working capital adjustment. This view is supported by various judgments relied upon by the assessee as stated (supra). Accordingly, Ground of appeal Nos. 1 to 1.7 raised by the assessee are partly allowed. 39. Coming to Ground of appeal No.2 raised by the assessee regarding adjustment of notional interest on delayed payments on the outstanding invoice from its AE's. The TPO has considered the invoice payment and computed the notional interest at six [06] month LIBOR + 300 basis point which comes to 8.277 ....
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....tional transaction intended to benefit the AE in some way. 11. The Court finds that the entire focus of the AO was on just one AY and the figure of receivables in relation to that AY can hardly reflect a pattern that would justify a TPO concluding that the figure of receivables beyond 180 days constitutes an international transaction by itself. With the Assessee having already factored in the impact of the receivables on the working capital and thereby on its pricing/profitability vis-à-vis that of its comparables, any further adjustment only on the basis of the outstanding receivables would have distorted the picture and re-characterised the transaction. This was clearly impermissible in law as explained by this Court in CIT v. EKL Appliances Ltd. (2012) 345 ITR 241 (Delhi)." 42. In the instant case, as observed above, the assessee has already considered the working capital adjustments while charging for the services rendered. Thus, by considering the overall facts and circumstances of the case and by respectfully following the judgment of Hon'ble High Court, we are of the considered view that no further adjustment on account of outstanding receivables is requir....
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....ve been duly accounted for. Further, the tax of the above expenses was paid to the Indian Tax Authority. The assessee further claimed that the TPO has disallowed the global cost and at the same time, has not provided all corresponding adjustment in computing the ALP for back office support services and software services provided to its AE thus, it has resulted into double taxation. Ld. CIT(A) after considering these facts, has deleted the addition by following observation in para 7.4 of the order:- 7.4 "I have considered the facts of the case, submission of the appellant as against the findings/observations of the AO/TPO in his assessment order u/s. 143(3)/92CA(3) of the I.T. Act. The contentions and submissions of the appellant are being discussed and decided here in under: i. It is the fact of the case there are international transactions undertaken by the appellant in respect of the communication charges, computer charges and professional charges totalling to Rs. 506,433,386/- ii. It is also the fact of the case that such transaction have been reflected in the audit report in the form 3CEB of the appellant. iii. It has also been mentioned in t....