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TMI Blog2015 (12) TMI 903X X X X Extracts X X X X X X X X Extracts X X X X ..... g the TP report and taking into consideration the functional profile of the assessee, determined the ALP of services rendered at Rs. 22,24,02,990/- and since the price received was Rs. 18,03,75,500/-, directed for adjustment of Rs. 4,20,27,490/-. The other adjustment directed by ld. TPO was on account of accrual of interest on receivables, aggregating to Rs. 79,98,190/-. The assessee filed objections before ld. DRP. Ld. DRP issued directions on the basis of which the AO passed the final assessment order and made total TP adjustment of Rs. 2,67,22,563/-. Being aggrieved with the assessment order, the assessee is in appeal before us and has taken following grounds of appeal: "1. The assessment order passed by the Income Tax Officer, Coy. Ward 1(3), New Delhi [Learned Assessing Officer (Ld. AO')] pursuant to directions of the Hon'ble Dispute Resolution Panel (Hon'ble DRP') is bad in law. 2. The Hon'ble DRP erred both on the facts and in law, in cnfirming the addition to the extent of Rs. 26,722,563 to the income of the Appellant by holding that its international transaction pertaining to provision of information technology enabled services do not satisfy the ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i.e 13.25%. 10. On the facts and in the circumstances of the case, the Ld. AO erred In initiating penalty proceedings under section 271 (1)( c) of the Act. 11. On the facts and in the circumstances of the case, the Ld. AO erred in levying interest under section 234B and 234D of the Act. 12 On facts and in law the Ld. AO made computational errors in calculating the tax payable and interest under section 234B and 234D of the Act. 4. Brief facts of the case are that the assessee is an Indian company and subsidiary of Actis LLP.UK. The group was established as a Private Equity Investment Fund. 99.99% shares of company were held by Actis International Ltd. and the balance one share was held by Actis Assets Ltd. The function of the assessee in the TP document had been summarized as a back office service provider to the AE Actis Capital LLP. Services provided were stated to be financial accounting function, fund accounting function, HR support function, IT support function etc. Thus, the functions of the assessee primarily were of providing IT enabled services such as back office operations/ processing centres, bill paying centres, web enabled services, email support, IT help desk ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P study and the remarks of the ld. TPO on various comparables, were as under: S. No. Name of the Company Average (%) Remarks 1. AOK Inhouse BPO Services Ltd. 12.58% Rejected, as not fulfilling the filters 2. Aditya Birla Minacs Worldwide Ltd. 8.06% Rejected, as not fulfilling the filters 3. Cameo Corporate services Ltd. 9.77% Rejected, as not fulfilling the filters 4. Cosmic Global Ltd. 34.14% Accepted as it qualifies all the filters proposed by TPO 5. Delta Services (I) Pvt. Ltd. 6.67% Rejected, as not fulfilling the filters 6. Informed Technologies Ltd. 12.01% The company ahs ITES income less than 75%. Hence rejected 7. Infosys BPO Ltd. 24.29% 8. KNM Services Pvt. Ltd. . 13.69% Rejected, as not fulfilling the filters 9. Optimus Global Services Ltd. -1.85% Rejected, as not fulfilling the filters 10. Sparsh BPO Services Ltd. 5.97% Rejected, as not fulfilling the filters 11. Crosdomain Solutions Pvt. Ltd. 28.32% Modified by the latest data as per available with TPO 12. Omega Healthcare Management Services Pvt. Ltd. 9.34% 13. Inhouse Productions Ltd. 4.32% Modified by the latest data as per available with TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s: "The TPO/AO is accordingly directed to verify the amount of receivables: i) In case the aggregate amount of receivables from the AEs does not exceed Rs. 50 crores, apply Prime Lending Rate of SBI as on 30th June of relevant previous year plus 150 basis points (ii) In case the aggregate amount of receivables from the AEs excess Rs. 50 crores, apply Prime Lending Rate of SBI as on 30th June of relevant previous year plus 500 basis points." 16. Ground nos. 1 & 2 are general. Ld. counsel did not press ground nos. 3 & 4 and, accordingly, these grounds are dismissed as not pressed. 17. Apropos ground no. 5, ld. counsel for the assessee referred to page 14 of DRP's order wherein the findings as regards exclusion of companies with export sales less than 25% of the sales is contained. 18. Ld. counsel submitted that when the comparables selected by assessee were functionally similar to that of the tested party (assessee), then there was no relevance of export filter and the same should not have been applied. 19. Ld. counsel referred to Rule 10A(a), which has now been renumbered as clause (ab), wherein the definition of uncontrolled transaction is given, which means a transaction be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail" (2) Export filter ensures that comparable entities are operating in the same geographical location. Those geographical markets, in which parties entering into transactions operate is an important factor which influences the price of the transactions. With the geographical market, in which the other party is located, all those factors which influence the transaction price also come into play. If we do not factor in this into our identification of uncontrolled com parables, we would be making an incorrect identification. The main reason for applying export earnings filter is that the assessee is providing its services from India to U.K. the comparable companies could also, as far as possible, should be providing services from India to such countries or similarly developed countries like UK, Europe etc, so that the prevailing market conditions in the countries in which the buyer and seller are located are same similar. Otherwise, adjustments need to be made fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s as that of the tax payer. Therefore the companies that are predominantly into the domestic market cannot be compared with the assessee who is a predominantly export oriented service provider. (5) Following cases are relied in this regard. (i) Chiron Behring vaccines Pvt. Ltd. 2011-TII-30-ITAT Mumbai-TP. (ii) Deloitte consulting India Pvt. Ltd. ITA No. 1082IHYD/2010 Hyderabad-ITAT. (iii) ITO vs CRM Services India Pvt. Ltd. 14 Taxman 96. (a) Further there should be no comparability of transactions in the domestic and export segment, a proposition held by Hon. ITA T in the case of Chiron Behring Vaccines Pvt. Ltd. 2011-TII-30-ITAT-MUM-TP. (b) This issue was also involved the recent judgment delivered by Hyderabad tribunal in the case of Deloitte consulting India Pvt. Ltd. ITA No. l082IHYD12010 Hyderabad-ITAT .. Wherein the use of this filter was approved by the Hon. Tribunal in para 39 of the judgment reproduced below: . "39. The next ground is with regard to rejection of independent comparable companies by TPO/CTT(A) on the basis that they do not have any foreign exchange revenue. We find that the TPO, in the case of back office services segment, has rejected the following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the TPO in rejecting the aforesaid company as not comparable is justified. In view of the above, five companies listed above shall not be included in the final list of comparable companies. (c) Another judgment where this issue is discussed is ITO vs CRM Services India (P) Ltd. 14 Taxmann 96 as below: " 15. Ground no. 4.5 is against rejection of Shreejal info Hubs Ltd. As a comparable case. In this connection, it has been mentioned in the TPO's order that the assessee raised objection and it was submitted that this company is carrying out business of vending information, i.e. customer support or a contract centre. This business is similar to the BPO business. The TPO rejected the submission by mentioning that vending of information and rendering services to call centre are activities different from running a call centre. Therefore, the functional profile of the two companies were different. 15.1 Before us, the Id. Counsel mentioned that the information vending is nothing but customer support or contract centre. Thus, Shreejal info Hubs Ltd. Is importing information of supplier of goods and services to prospective customers. As per director's report, it is carryin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bles selected by assessee where export to total sales is less than 25%. Admittedly, the assessee is mainly an export oriented IT enabled service provider, deriving 100% of its revenues from exports in this segment. The contention of ld. counsel is that since it is not disputed that the comparables selected by assessee were functionally similar to that of assessee, therefore, by applying this filter of export sales of less than 25% for excluding the comparables is not justified because there is nothing in law to adopt this filter. On the contrary, he submitted, that law prescribes that the comparables can be residents or the non-residents. In our opinion, the submission advanced by ld. counsel cannot be accepted, particularly in view of Rule 10B which prescribes the mode of determination of ALP u/s 92C. Rule 10B(1) prescribes various methods which can be adopted by the tested party to determine the ALP. One of the methods prescribed is transactional net margin method, which is reproduced hereunder: Determination of arm's length price under section 92C. 10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it mark-up to such costs (computed according to the same accounting norms) arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transactions, is determined; (iii) the normal gross profit mark-up referred to in sub-clause (ii) is adjusted to take into account the functional and other differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect such profit mark- up in the open market; (iv) the costs referred to in sub-clause (l) are increased by the adjusted profit mark-up arrived at under sub-clause (iii); (v) the sum so arrived at is taken to be an arm's length price in relation to the supply of the property or provision of services by the enterprise; (d) profit split method, which may be applicable mainly in international transactions involving transfer of unique intangibles or in multiple international transactions which are so interrelated that they cannot be evaluated separately for the purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (I) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction. 25. Rule 10B(2) prescribes various factors which have to be taken into consideration for the comparability of an international transaction, which are as under: "10B(2) For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; - KNM Services Pvt Ltd; - Sparsh BPO Services Ltd; and - Timex Group India Ltd. 28. All these comparables had been excluded as they did not pass through export filter applied by ld. TPO. As we have already upheld the export filter applied by ld. TPO in earlier part of our order, we reject the assessee's contention. 29. However, as regards Aditya Birla Minacs Worldwide Ltd, ld. counsel referred to the annual report contained at page 364 of the paper book, wherein it is mentioned in schedule 17 Notes to Accounts" that earning in foreign currency (accrual basis) for IT enabled services was Rs. 15825.42 lacs. He submitted that it is 71.57% of the total sales and, therefore, could not be rejected by applying the filter of export sales of being less than 25% of total sales. He submitted that computation has not correctly been done by ld. TPO. 30. Having heard both the parties, we restore this issue to the file of ld. TPO to examine the computation of export earnings to total sales as claimed by ld. counsel for the assessee and, if, the same is found to be correct, then this comparable has to be included in the list of comparables. 31. In the result, ground no. 5 is partly all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rger of the two functionally similarly placed companies take place, the event of merger itself cannot be taken as a factor for exclusion of the said comparable. 36. Ld. Sr. DR submitted that para 33 of Chryscapital read with para 44 makes it clear that only adjustment is to be made but the comparable cannot be rejected. He pointed out that Actis is a brand and, therefore, assessee was also having intangibles, therefore, out right exclusion of this is not warranted. He, therefore, submitted that the matter should be restored to the AO/ TPO so that inquiry is made in the light of the decision in Agilent Technologies & Chryscapital. 37. Ld. Counsel for the assessee, in the rejoinder, submitted that adjustments can be made only when specific difference can be identified, which has not been done by Revenue. He submitted that considering the overall business profile of Infosys, the same is not at all comparable to assessee. 38. We have considered the submissions of both the parties and have perused the record of the case. There is no denying of the fact that Infosys BPO operates on a large scale and caters to wide variety of customers operating in different industries. Ld. counsel has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s allowed. 44. The next ground no. 7, raised by ld. counsel for the assessee is regarding inclusion of eClerx Services Limited. Ld. counsel pointed out that this company is a data analytical knowledge process outsourcing service provider. It provides data analytics, data management and process improvement solutions to global enterprise clients, mainly in capital markets and financial services. Ld. counsel submitted that the company's engagements are concerned of the two specializations, namely, capital market and financial services, wherein it provides model office and back office support to the capital market business and sales and marketing support. 45. Ld. counsel referred to the annual report of this comparable company, wherein it is stated as under: "eClerx Services Limited (eClerx) is a knowledge process Outsourcing (KPO) Company providing data analytics, data management and process improvement solutions to global enterprise clients, eClerx supports its clients through two business units - Financial Services and Sales and Marketing Support. x x x x x x x x x In the Capital Markets division, the Company today provides end-to-end financial transaction support services s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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." 47. After hearing both the parties, we direct the ld. TPO to exclude this comparable from the list of comparables in view of decision of Hon'ble Delhi High Court as this company is functionally different, which is evident from the business profile of eClerix, reproduced earlier from Annual Report. 48. In the result, ground no. 7 is allowed. 49. Apropos ground no. 8 ld. counsel for the assessee submitted that assessee being a captive or low risk service provider, operates in a virtually risk free environment , while entrepreneurial enterprises like comparable companies selected by ld.TPO undertake the full range of economic risks, such as, market risk, price risk, product risk, idle-time risk, credit risk, foreign exchange fluctuation risk, technology o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. Before ld. DRP also the assessee failed to furnish any data for quantification of risk. Unless the difference can be ascertained accurately and their import on the margin can be assessed with reasonable accuracy, the adjustment cannot be allowed. Under such circumstances, the matter also cannot be restored back to the file of ld. TPO. In the result, ground no. 8 is dismissed. 53. Ground no. 9: Brief facts, apropos ground no. 9, are that AO noticed that the assessee had got outstanding receivables of Rs. 5,90,80,860/-. He further noticed that the opening balance of such receivables was Rs. 3,88,32,043/-. These receivables were from the AE of the assessee itself, for whom services were rendered by the assessee. Accordingly, AO issued show cause notice, inter alia, observing, as under: "Accordingly, the above deferred payment/ receivable is proposed to be considered as an international transaction requiring determination of ALP. In absence of any suitable CUP data or credit rating of your AE, interest on the outstanding balance at the end of the year is proposed to be benchmarked at the prime lending rate of SBI plus 500 bps. The 500 of basic point is added to take into account ..... X X X X Extracts X X X X X X X X Extracts X X X X
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