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2015 (8) TMI 652 - ITAT DELHI

2015 (8) TMI 652 - ITAT DELHI - TMI - Transfer pricing adjustment - inclusion/exclusion of certain companies in/from the list of comparables - Held that:- Cosmic Global Ltd. (Seg.) - the functional comparability of the Accounts BPO segment of Cosmic Global has been accepted by the ld. AR. In that view of the matter and respectfully following the judgment of the Hon’ble High Court in the case of ChrysCapital Investment Advisors (I) Pvt. Ltd. (2015 (4) TMI 949 - DELHI HIGH COURT), we hold that Cos .....

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e same applies with full force in the converse manner as well to a low turnover/low profit company. In principle, we direct the inclusion of the relevant segment of this company in the list of comparables. The TPO is directed to include the operating profit/operating costs of the ITES segment of this company in the list of comparables, after due verification of the necessary figures for the purposes of determination of the operating profit margin etc.

Accentia Technologies Ltd. - apar .....

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incomparable. We, therefore, direct to remove this company from the list of comparables.

e- Clerx Services Ltd.is a Knowledge Process Outsourcing (KPO) company providing data analytics and data process solutions to global clients. This company provides end to end support through trade life cycle including trade confirmations and settlements etc. It also provides sales and marketing support services to leading global manufacturing, retail, travel and leisure companies through its prici .....

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ble.

R. Systems International Ltd. (Seg.) - It is clarified that only if the assessee succeeds in providing the relevant data of this company for the concerned financial year on the basis of the information available from the Annual reports only, the TPO should include this company in the list of comparables by considering its OP/TC on the basis of the financial year ending 31.3.2009. If however, even though its quarterly data is available and can be compiled for the relevant financi .....

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RE ) has held that foreign exchange fluctuation gain is part of operating profit of the company and should be included in the operating revenue. Similar view has been taken in Trilogy E Business Software India (P) Ltd. Vs DCIT (2011 (6) TMI 392 - ITAT BANGALORE ). Thus we are of the considered opinion that the amount of foreign exchange gain/loss arising out of revenue transactions is required to be considered as an item of operating revenue/cost, both of the assessee as well as comparables. We, .....

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tion on transaction to transaction basis. To put it differently, suppose an invoice is raised on 1st May; period allowed for realization is two months; and the invoice is actually realized on 31st December. Notwithstanding the fact that interest on such late realization would become chargeable for a period of 6 months (from 1st July to 31st December), but the amount of invoice will not be receivable as at the end of the financial year on 31st March. As such, this receivable would not have an imp .....

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/Del/2014 - Dated:- 14-8-2015 - SHRI R.S. SYAL AND SHRI A.T. VARKEY, JJ For The Assessee : Shri Deepak Chopra, Shri Harpreet Ajmani & Ms Ananya Kapoor, Advocates For The Department : Shri Amrendra Kumar, CIT, DR and Ms Y. Kakkar, Sr.DR ORDER PER R.S. SYAL, AM: These two cross appeals - one by the assessee and the other by the Revenue - arise out of the final order dated 28.2.2014 passed by the Assessing Officer (AO) u/s 143(3) read with section 144C of the Income-tax Act, 1961 (hereinafter a .....

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holly owned subsidiary of Ameriprise, US, which parent company is engaged in the business of insurance, annuities, asset management and brokerage. The primary object of Ameriprise US is to provide services towards financial planning and other areas like institutional asset management and advisory, pension fund management, the management and administration of certain plans. The assessee was incorporated in August, 2005 and started operations in October, 2005. It is engaged in providing Informatio .....

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was computed by the assessee at 14.66%. Six companies were considered as comparable which have been listed on page 10 of the Transfer Pricing Officer s (TPO) order. It was shown that their arithmetic mean of operating profits compared favourably with assessee s profit rate and, hence, the international transaction of Provision of IT enabled back office services was at arm s length price (ALP). On a reference made by the AO for determining the ALP of the international transactions, the TPO treate .....

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ables, was rejected. On the basis of the above average operating profit margin of the comparable companies at 46.66%, computed on the basis of only the current year s data, the TPO proposed transfer pricing adjustment, which has been assailed in the instant appeal. 5. The first issue pressed before us is against the inclusion/exclusion of certain companies in/from the list of comparables. In this regard, the assessee is aggrieved against the inclusion of the following three companies, viz., i. C .....

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rder enlists the functions performed by the assessee, which have been classified broadly into certain categories. The first category is Financial services which includes Accounting support, Mutual fund accounting, Sales and use tech support. Under this category, the assessee provides services to Ameriprise US in the nature of Credit purchasing cards, Bank reconciliation, Inter-company reconciliations, Maintenance of fixed asset registers and Payroll, etc. The second category is Financial plannin .....

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ting contracts for intellectual property claims. The next broad category is Data analytics services , which involves scrambling and assembling of data into a more meaningful form to enable Ameriprise, US to review the performance of various products offered to its customers and other related activities. The next broad category is Vendor management services which means performing data processing services in respect of call centres and back office operations of certain companies, outsourced by Ame .....

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resources processes for the US employees including processing payroll, calculating benefits, managing leave of absence, etc. 8. A narration of the above nature of services depicts that the conceptualization of the services is primarily done by Ameriprise US which collects data and sends the same in raw form to the assessee or the other relevant data is procured by the assessee directly from the sources referred by the Ameriprise US. The assessee compiles such raw data in desired format/sequence .....

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the assessee to Ameriprise US, as under :- 3. PRODUCTS AND SERVICES TO BE SUPPLIED BY AIPL AIPL shall, at the request of Ameriprise, USA, supply to Ameriprise, USA or its Designated Offices, the specified products and services as follows: a. AIPL shall process the raw data received/sourced from or on directions of Ameriprise USA and, as applicable, its Designated Offices. b. AIPL shall present the customized/processed data in the form f reports/graphs/diagrams as the final output. c. AIPL shall .....

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, Back Office/Remote Data Entry and any other similar activities. e. AIPL shall also analyse the performance data of third party vendors appointed by Ameriprise USA in India for rendering of outsourced call centre and back office services. This would include: i. Collection of data on performance of back office operations in India; ii. Analyse, evaluate and process such data into specified formats by applying information technology tools and provide suitable observations thereof. f. To the extent .....

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nature of collection of data in one form or the other and then, sending reports to Ameriprise US. In other words, the assessee is involved in providing back office support services to Ameriprise US without any direct involvement in the conduct of business of Ameriprise US. With the above background of the assessee s nature of work done for its AE, which is primarily in the nature of rendering IT enabled services, which position has also been admitted by the TPO as well, we proceed to determine .....

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ontention and treated the same as comparable. No relief was allowed by the Dispute Resolution Panel (DRP). 11.2. After considering the rival submissions and perusing the relevant material on record, it is observed that the TPO has taken only Accounts BPO segment of Cosmic Global Ltd., as comparable. The argument of the ld. AR for the exclusion of this company is that the Accounts BPO segment of this company, though comparable with the assessee s nature of activity, has a small turnover of less t .....

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(I) Pvt. Ltd. vs. DCIT, vide its recent judgment dated 27.4.2015 has held that high profit or high turnover cannot be a criteria to exclude an otherwise comparable company. In view of this later development, being the advent of the judgment of the Hon ble jurisdictional High Court in the current year itself, the view taken in the case of Mercer Consulting (supra), being the exclusion of Cosmic Global due to low turnover, does not stand any more. Here, it is pertinent to mention that there was a .....

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ignificant to note that the Tribunal in its later order dated 6.7.2015 in Techbooks International Pvt. Ltd. vs. DCIT (ITA No.240/Del/2015) has simultaneously considered the impact of the judgments of the Hon ble Delhi High Court in CIT vs. Agnity India Technologies Pvt. Ltd. (2013) 219 Taxman 26 (Del) and later case of ChrysCapital Investment Advisors (I) Pvt. Ltd. (supra). After making a comparative study, the Bench has held that a company with a high turnover cannot be excluded on this criteri .....

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to rest by the Hon ble Supreme Court. A particular view taken by the tribunal, becoming contrary to the later view of the jurisdictional High Court on the same issue, cannot be impressed for adoption. Coming back to the facts of the instant case, we find that the functional comparability of the Accounts BPO segment of Cosmic Global has been accepted by the ld. AR. In that view of the matter and respectfully following the judgment of the Hon ble High Court in the case of ChrysCapital Investment .....

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d that the TPO has accepted the functional comparability of this company on segmental level. The ld. DR was also fair enough to candidly accept the functional similarity of the relevant segment of this company. In such circumstances, the question arises as to whether this company on segmental level, can be excluded from the list of comparables merely on the ground that the revenue from this segment was only ₹ 86 lacs? In our considered opinion, the quantum of turnover can be no reason for .....

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company in the list of comparables. The TPO is directed to include the operating profit/operating costs of the ITES segment of this company in the list of comparables, after due verification of the necessary figures for the purposes of determination of the operating profit margin etc. iii) Accentia Technologies Ltd. 13.1. The TPO considered this company as comparable. The assessee s objections about the functional dissimilarity were brushed aside. Now, the assessee challenges the inclusion of th .....

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bvious reason for the exclusion of this company is the pooling of income from software products in its overall profitability, which cannot be separated with precision, thereby rendering it incomparable. We, therefore, direct to remove this company from the list of comparables. iv) e- Clerx Services Ltd. 14.1. The TPO treated this company as comparable and the assessee s objections about the functional dissimilarity were ignored. 14.2. After considering the rival submissions and perusing the rele .....

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carried on by e-Clerx Services Ltd., it is manifest that the same being a KPO company, is quite different from the assessee, providing only IT enabled services to its AE. Apart from that, it is further observed that this company has significant intangibles which it uses in rendering KPO services, against which the assessee does not have any intangibles. As such, e-Clerx Services Ltd. cannot be considered as comparable. The same is directed to be eliminated. v) R. Systems International Ltd. (Seg .....

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hen it was otherwise functionally similar, a fact which has not been disputed by the TPO. The ld. DR opposed this contention by submitting that the data for the year ending of this company was not similar to that of assessee company and hence it was rightly excluded. 15.2. After considering the rival submissions and perusing the relevant material, it is noticed that the assessee company is having financial year covering the period 1.4.2008 to 31.3.2009. In that view of the matter, a valid compar .....

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ability of an uncontrolled transaction can be analyzed only with the data relating to the financial year in which the international transaction has been entered into. In other words, if the tested party has March year ending, then, the comparables must also have the data relating to the financial year ending 31st March itself. If such a data is not available, then, a company albeit functionally comparable, disqualifies. Espousing the facts of the extant case, we find that insofar as the function .....

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m the Annual reports of this company, which could be adjusted for the financial year ending 31.3.2009. If the contention of the assessee is correct, that the relevant data for the concerned financial year can be deduced from the information available from its annual report, then, there can be no objection to its inclusion in the list of comparables with the adjusted data for the relevant financial year itself. Under such circumstances, we set aside the impugned order and remit the matter to the .....

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al year, but the amounts of operating profit or operating cost etc. for the relevant financial year are not directly available without any apportionment or truncation, then this company should not be considered as comparable. 16.1. The second issue taken up before us is against treating foreign exchange difference as non-operating as against the assessee s treatment of operating cost. On a pertinent query, it was stated by the ld. AR that the foreign exchange loss relates to its transactions fro .....

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When the foreign exchange loss directly results from the trading items, we fail to appreciate as to how such foreign exchange fluctuation loss can be considered as non-operating. 16.3. The Special Bench of the Tribunal in ACIT Vs Prakash I. Shah (2008) 115 ITD 167 (Mum)(SB) has held that the gain due to fluctuations in the foreign exchange rate emanating from export is its integral part and cannot be differentiated from the export proceeds simply on the ground that the foreign currency rate has .....

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have a different character from the transaction to which it pertains. The Bench found fallacy in the submission made on behalf of the Revenue that the exchange rate difference should be detached from the exports and be considered as an independent transaction. Eventually, the Special Bench held that such exchange rate fluctuation gain/loss arising from exports cannot be viewed differently from sale proceeds. 16.4. In the context of transfer pricing, the Bangalore Bench of the Tribunal in SAP Lab .....

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inion that the amount of foreign exchange gain/loss arising out of revenue transactions is required to be considered as an item of operating revenue/cost, both of the assessee as well as comparables. We, therefore, hold that the AO was not justified in considering forex loss as non-operating cost as against the assessee s claim of operating cost. 17. With the above remarks, we set aside the impugned order and send the matter back to the file of TPO/AO for determining the ALP of the international .....

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Succinctly, the factual matrix concerning this ground is that the assessee had shown certain receivables from its AE. On examination of the assessee s balance sheet, it was noticed by the TPO that payments against the invoices raised by the assessee were not received within the stipulated time as provided in the Agreement. On being called upon to furnish the time period for payment as per Service agreement and why the delayed payments be not treated as unsecured loans advanced to the AEs, the as .....

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ble to interest, he proposed TP adjustment of ₹ 5,98,083/-. The DRP has discussed this aspect on page 26 of its direction. It was held that since direction for allowing of working capital adjustment was given by it, the issue of any interest element pertaining to the receivables would be subsumed in the same. It was accordingly held that no separate transfer pricing adjustment was called for. The Revenue is aggrieved against this direction given by the DRP. 20. The ld. AR supported the imp .....

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transfer pricing adjustment on account of the delayed realization of invoices from AEs has been upheld. The ld. DR contended that the order in the case of Kusum Healthcare Pvt. Ltd. (supra), has been passed without considering the amendment to section 92B carried out by the Finance Act, 2012 with retrospective effect from 1.4.2002, which has been duly taken into account by the Tribunal in its later order in Techbooks International Pvt. Ltd. (supra). 21. After considering the rival submissions a .....

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Sub-clause (c) of clause (i) of this Explanation, which is relevant for our purpose, provides as under:- Explanation.-For the removal of doubts, it is hereby clarified that- (i) the expression "international transaction" shall include- (a) ………… (b) ……….. (c) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferr .....

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s an international transaction. That being so, the payment/non-payment of interest or receipt/non-receipt of interest on the loans accepted or allowed in the circumstances as mentioned in this clause of the Explanation, also become international transactions, requiring the determination of their ALP. If the payment of interest is excessive or there is no or low receipt of interest, then such interest expense/income need to be brought to its ALP. The expression debt arising during the course of b .....

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uncharged. Under such circumstances, the contention taken by the assessee before the TPO that it is not an international transaction, turns out to be bereft of any force. 23. The Hon ble Bombay High Court in the case of CIT vs. Patni Computer Systems Ltd., (2013) 215 Taxmann 108 (Bom.) dealt, inter alia, with the following question of law:- (c) Whether on the facts and circumstances of the case and in law, the Tribunal did not err in holding that the loss suffered by the assessee by allowing ex .....

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2002. Setting aside the view taken by the Tribunal, the Hon ble High Court restored this issue to the file of the Tribunal for fresh decision in the light of the legislative amendment. 25. The foregoing discussion discloses that non-charging or undercharging of interest on the excess period of credit allowed to the AE for the realization of invoices amounts to an international transaction and the ALP of such an international transaction is required to be determined. 26. Now, we come to the compu .....

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ed interest of a period of 30 days as a part of invoice value and computed this TP adjustment only where the realization has been made beyond 30 days. A reading of the Agreement dated 1.10.2005 between the assessee and Ameriprise US manifests that clause 6 deals with Price and payment. Para 6.5 of the Agreement provides as under:- 6.5 All payments shall be made on the basis of the invoices raised by AIPL and shall be cleared within thirty days from the date of the invoice. Under no circumstances .....

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assessee to its AE for payment of invoice is 60 days. This indicates that interest for the period up to 60 days from the date of invoice is factored in the price charged for the rendering of the services, which means that no interest can be separately charged in case of realization of invoices up to a period of 60 days from the date of invoice. As we have noticed above that all the invoices stood realized within a period of 60 days, there can be no question of charging any interest as a separat .....

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e international transaction, whose ALP is required to be determined. Granting of working capital adjustment is confined to the international transaction of rendering of services, whose ALP is separately determinable. On the other hand, the international transaction of interest receivable from its AEs for late realization of invoices beyond such stipulated period is a separate international transaction. Allowing working capital adjustment in the international transaction of rendering services can .....

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on of the ALP of the separate international transaction of interest on allowing the working capital adjustment in the international transaction of rendering of services. In our considered opinion, both the transactions are separate and distinct from each other. Whereas the international transaction of rendering services contemplates comparison of the price charged for rendering services by impliedly including the interest for the period allowed for realization of invoices as per the terms of the .....

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