TMI Blog2016 (1) TMI 1117X X X X Extracts X X X X X X X X Extracts X X X X ..... xtraordinary financial event, renders it incomparable. Following the reasons taken note of above, we order for the elimination of this company from the final set of comparables. TCS E-Serve International Ltd. and TCS e-Serve Ltd.the entity level figures render this company as unfit for comparison. Therefore, we order for the removal of this company from the final set of comparables. eClerx Services Limited excluded from the final set of comparables. R. Systems (Seg.) - We note that in the immediately preceding year, this Company was considered by Coordinate Bench of Tribunal. It was directed that 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 their annual reports, then, there can be no objection to the inclusion of these companies in the list of comparables with the adjusted data for the relevant financial year itself. Respectfully following the reasoning of Coordinate Bench in immediately preceding year, we set aside the impugned order and remit the matter to the file of TPO/AO for examining this aspect of the matter. CG-VAK Software and Exports Ltd. (Seg.) - at a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of the Act read with the Income-tax Rules, 1962 ( the Rules ), and modifying the same for the determination of the Arm s Length Price ( ALP ) of the impugned transactions to hold that the same are not at arm s length without returning a finding about existence of any of the circumstances specified in clauses (a) to (d) of sub-section (3) of section 92C of the Act. 3. The learned TPO / AO / DRP have erred in: a. Not accepting the use of multiple year data, as adopted by the Appellant in its Transfer Pricing ( TP ) documentation; and b. Determining the arm s length margins / prices using data pertaining only to financial Year ( FY ) 2009-10 which was not available to the Appellant at the time of complying with the Indian TP documentation requirements. 4. The learned TPO / AO / DRP have erred in rejecting certain comparable companies selected by the Appellant by applying inappropriate comparability criteria such as : a. Turnover less than INR 5 crore; b. Diminishing revenue; c. Export turnover less than 75 percent of operating revenues; and d. Different accounting year 5. The learned TPO / AO / DRP have erred in erroneou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtain plans. The assessee was incorporated in August, 2005 and started operations in October, 2005. It is engaged in providing Information Technology (IT) enabled services to Ameriprise US. The assessee reported two international transactions, including remuneration from the `Provision of IT-enabled back office services with transacted value of ₹ 60,57,56,819/-. The assessee applied the Transactional Net Margin Method (TNMM) as the most appropriate method for benchmarking the international transaction of provision of IT enabled back office support services. Profit level indicator (PLI) of Operating Profit/Operating Cost (OP/OC) was computed by the assessee at 15.66%. Eleven 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 treated only five companies as comparable from the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 planning services , which refers to the assessee providing support in client data entry for assistance in preparation of draft reports for customers. The third broad category is `General counsel office services, which includes E-discovery, Compliance, Profit and loss relations, Intellectual property claims and contracts drafting. This category refers to the assistance provided by the assessee in sorting legal cases and classifying them on the basis of reasons entailed therein and also assistance in drafting 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 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Offices. 3.4 AIPL shall also render/undertake other Information Technology enabled activities of Back Office operations including Data Management, Information processing, Revenue accounting, Support Centre, Design or Implementation of Management Information Systems and Decision Support System, Financial Control Accounting Systems, Back Office/Remote Data Entry and any other similar activities. 3.5 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: 3.5.1 Collection of data on performance of back office operations in India; 3.5.2 Analyse, evaluate and process such data into specified formats by applying information technology tools and provide suitable observations thereof. 3.6 To the extent necessary or desirable, the Parties shall be free to add one or more schedules to this Agreement to describe in greater detail the Specified Products and Services. 7. A perusal of the clause 3 of the Agreement between the assessee and Ameriprise US, reveals that the assessee is to collect and then process the data re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... report of this company, a copy of which has been placed in the paper book. Notes to Accounts of this company, indicate about the amalgamation of Asscent Infoserve Pvt. Ltd. with it as approved by the shareholders in the court convened meeting held on 25.4.2009 and, subsequently, sanctioned by the Hon ble High Court on 21.8.2009. The Mumbai Bench of the Tribunal in Petro Araldite (P) Ltd. Vs. DCIT (2013) 154 TTJ (Mum) 176, has held that a company cannot be considered as comparable because of exceptional financial results due to mergers/demergers. Similar view has been bolstered by the Delhi Bench of the Tribunal in several cases including Ciena India Pvt. Ltd. Vs. DCIT (ITA No.3324/Del/2013) vide its order dated 23.4.2015 and Techbook International P. Ltd. vs DCIT (ITA No. 240/Del/2015) vide its order dated 06.07.2015. In view of the fact that there was merger of Asscent Infoserve Pvt. Ltd. with Accentia Technologies Ltd. by way of amalgamation during the year itself, we hold that this company cannot be considered as comparable due to this extra-ordinary financial event. Accordingly, the same is directed to be excluded from the final list of comparables. 9. i-Gate Global Solutio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere was acquisition by this company of McCamish Systems LLC. Acquisition of McCamish Systems LLC during the year, being an extraordinary financial event, renders it incomparable. Following the reasons taken note of above, we order for the elimination of this company from the final set of comparables. 11. TCS E-Serve International Ltd. 11.1. The assessee objected to the inclusion of this company on the ground that there is exceptional rise in turnover and profits, as this is the second year of operations of the Company and first full-year as a step down subsidiary of TCS. It was also agitated that Company is functionally dissimilar and there are insufficient segmental information. The TPO noticed that this company was also offering ITES. He did not treat high turnover of this company as a relevant factor in considering the comparability. Eventually, this company was included in the final set of comparables. 11.2 We have heard the rival submissions and perused the relevant material on record. Notes to Accounts indicate that this company is engaged in the business of providing IT enabled services/BPO services primarily to Citigroup entities globally. The operations of this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ystal clear that there is a phenomenal difference between a company providing software development services and a company providing software non-development services in terms of expertise, professional qualification and experience required for rendering such services. A company providing software non-development services performs a relatively low-end service. Thus the line of distinction is that whereas a company providing software development services helps in the creation, maintenance or updation of a software, on the other hand, a company providing non-development software services obtains the desired result with the use of an existing software. Further, whereas the output of the former is a software in itself or a stage in the ultimate creation of a software, the output of the later is the processed information from the raw data obtained with the help, inter alia, of a software. From the above discussion, it is overt that a company providing software development services is distinct from and incomparable with a company providing non-development software services. 11.4 We find that the assessee is a company providing non-development software services, in the nature of conv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices (ITES) / Business Process Outsourcing (BPO) services, primarily to Citigroup entities globally. The Company s operations broadly comprise of transaction processing and technical services. Transaction processing includes the broad spectrum of activities involving the processing, collections, customer care and payments in relation to the services offered by Citigroup to its corporate and retail clients. Technical services involve software testing, verification and validation of software at the time of implementation and data centre management activities. 12.3 We also note that Segmental Information given in Point No. 8 of Schedule O Notes to Accounts in standalone financials of the annual report shows that Company is engaged in Business Process Outsourcing (transaction processing) services to the Banking Financial Services Industry (BFSI), which is considered as a single segment. 12.4 It was fairly conceded by Ld. AR that this company has been considered as Comparable by the Delhi Bench of Tribunal in Techbook International P. Ltd. (supra), by observing as follows : The company s overview has been discussed on page 467 of the paper book, which divulg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are available. On a careful reading of the decision of coordinate Bench in Techbook International P. Ltd. (supra) it is clear that Schedule O Notes to Accounts in respect to carried out by Company and relevant segmental details were never brought to the attention of the Bench. We find that in the absence of the availability of any such segregation of the total revenue of this company, it is not possible to separately consider its profitability from rendering of `Transaction processing services . Thus, the entity level figures render this company as unfit for comparison. Following the above reasons also taken note in the case of TCS e-Serve International Limited, we order for the elimination of this company from the final set of comparables. 13. eClerx Services Limited 13.1 The assessee objected to the inclusion of this comparable on following points Reasons for rejection- 1) Significant intangible assets (pg. 137, 144 of PB-1) 2) Insufficient Segmental details (Financials-pg. 134 and pg. 144 of PB-1) This comparable has been rejected recently by the Hon ble ITAT, in Assessee s own case for AY 2009-10 (ITA No. 2010/Del/2014- Ameriprise India P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onally 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 these companies was not similar to that of assessee company and hence such companies were rightly excluded. 14.2. After considering the rival submissions and perusing the relevant material, it is noticed that the assessee company is having financial year ending covering the period 1.4.2009 to 31.3.2010. In that view of the matter, a valid comparison can be made only if the comparable companies too have the same financial year. In this regard, we consider it appropriate to note the relevant part of sub-rule (4) of Rule 10B which provides that: the data to be used in analyzing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction had been entered into. It is obvious from the language of sub-rule (4) that the comparability 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 ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of a company which is otherwise comparable. We find that Hon ble jurisdictional High Court in the case of ChrysCapital Investment Advisors (India) P. Ltd. Vs. DCIT has held, vide its judgment dated 27.4.2015, that high turnover or high profit can be no reason to eliminate an otherwise comparable company. The same applies with full force in the converse manner as well to a low turnover/low profit company. We, therefore, hold that a company cannot be excluded from the list of comparables on the ground of its low turnover. 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 determination of the operating profit margin etc. 16. Treatment of Foreign Exchange Fluctuation 16.1. The next 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 from oper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been taken in Trilogy E Business Software India (P) Ltd. Vs DCIT (2011) 47 SOT 45 (URO) (Bangalore). The Mumbai Bench of the Tribunal in S. Narendra Vs Addtl. CIT (2013) 32 taxman.com 196 has also laid down to this extent. In view of the foregoing discussion and respectfully following the view taken by Coordinate Bench in immediately preceding year, 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, 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. 16.5. 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 transaction afresh in conformity with our above observations. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in such fresh proceedings. 17. Inter-company Receivables 17.1 Briefly stated, the factual matrix concerning this ground is that the assessee had shown certain rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on range from the lowest of two days to the highest of 59 days from the date of the respective invoice. The TPO has considered 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 shall the payment be delayed for more than sixty days from the date of the invoice. Any revision to the credit period may be agreed by parties by exchanging e-mails or other forms of correspondence without requiring any change or modification to this Agreement. 27. Above para of the Agreement divulges that all the payments are required to be made by the AE within 30 days from the date of invoice and latest by 60 days from the date of invoice. It transpires that the maximum period allowed by the assessee to its AE for payment of invoice is 60 days. This i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... realization of invoices as per the terms of the agreement, the international transaction of charging interest on late recovery of trade receivable covers the period which starts with the termination of the period of credit allowed under the agreement, which is subject matter of the international transaction of rendering of services. There is one more fallacy in the reasoning given by the DRP about the subsuming of interest income in the working capital adjustment. It is simple that working capital adjustment is ordinarily computed by considering the average of the opening and closing values of inventories, receivables and payables. The TP adjustment on account of interest on delayed realization of invoice value has nothing to do with the closing or opening values. It depends on the period of realization 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 1July to 31December), but the amount of invoice will not be rece ..... X X X X Extracts X X X X X X X X Extracts X X X X
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