TMI Blog2017 (4) TMI 358X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee are only relating to man power and depreciation relating to computer, may not be sufficient, there may be other cost associated to the international transactions like administration, management resources etc. To substantiate the cost allocation method adopted by the assessee, Assessee has filed additional evidence before us, which requires verification. At the same time, some of the filters adopted by the TPO, as highlighted by CIT(A), are not proper and some of the comparables considered by the TPO are not relevant to the assessee. Considering the above factual errors, we remit the issue back to the file of the TPO for de-novo consideration. We direct the TPO to re-do the assessment after giving proper opportunity to the assessee in this regard. Accordingly, the grounds raised by the assessee are allowed for statistical purposes. - 1762/H/11, 1697/H/11, 49/H/13, 69/H/13, 1333/H/14, 872/H/14 - - - Dated:- 31-3-2017 - SHRI P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER For The Revenue : Shri P. Chandra Sekhar For The Assessee : Shri B. Satyanarayana Murthy ORDER PER S. RIFAUR RAHMAN, A.M.: These appeals are preferred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee are already accrued to the assessee. These are not refundable receipts. As per notes to Accounts at Point No.2, it was mentioned that Unmatured income includes the amount whereof has not been linked and identified with the individual customers - contracts in view of volumes and heterogeneous nature of contracts. Besides, there are no uniform payment terms in the variety of contracts entered into during the year. This, however, does not impact income accrual and disclosure in the balance sheet except in case of debtors to the extent of amount not so determined.' This note to the accounts clearly indicates that the income is already accrued in respect of these advances. 2. The assessee-company was requested to submit confirmations from the companies from whom these advances are received to show that these amounts are appearing as liabilities in their balance sheet to prove the point that this income is not accrued to the assessee. If the paying company debits the full expenditure on these payments, the receiving company cannot show part of the amount as receipt and part of the amount as advance. The examination of agreement copies entered by assessee with others ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11. Considered the rival submissions and perused the material facts on record. The issue is covered in favour of the assessee by the decision of the ITAT, Hyderabad in assessee s own case in ITA No. 1081/Hyd/04, for AY 2001-02, order dated 10/08/2007 wherein the coordinate bench observed as under: In the second ground, the revenue is aggrieved against the deletion of the addition made on account of difference in professional receipts. It was noted by the AO that as per two TDS certificates, the assessee had received professional fees aggregating to ₹ 1,39,125 (Rs. 1,18,125 + 21,000). However, the assessee had shown total receipts of ₹ 60,558/- only. The explanation of the assessee was that it follows mercantile system of accounting and under the said system, it recognizes the revenue on the basis of proportionate completion method which is recognized by the Institute of Chartered Accountants of India (ICAI) in its Accounting Standard of Revenue Recognition. Under this method, revenue is recognized proportionately by reference to the performance of each act. The revenue recognized under this method would be determined on the basis of contract value, associate cost, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he matter to TPO vide letter dated 23/11/2009 to determine Arm s Length Price (ALP). TPO vide his order u/s 92CA(3) of the Act dated 29/10/2010 determined the ALP of the international transactions at ₹ 14,45,74,324/- as against ₹ 9,86,40,527/- adopted by the assessee. Thus, the difference of ₹ 4,59,33,797/- is the adjustment made u/s 92CA of the Act. 13. Aggrieved with the above order, the assessee preferred an appeal before the CIT(A) and submitted before the CIT(A) that assessee has entered into BPO services with its AEs for the first time during this year and one time data cleaning services as detailed below: Telecalling Monster Worldwide, USA 7,21,39,173 Monster Worldwide, U.K. 50,77,468 Monster Worldwide, Singapore 79,59,335 8,51,75,976 Data Cleaning Monster Worldwide, U.K. 1,34,64,550 9,86,40,526 In the above transactions, assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of ₹ 4,59,33,797/-. 13.3 Assessee submitted that TPO has committed a mistake by increasing the cost incurred by the assessee in international transactions, TPO treated the entire cost of business of the assessee as one involved in international transactions, computed percentage of loss on overall basis and computed the cost by applying that percentage to the international turnover shown. 13.4 As regards the other issue relates to the percentage of mark up recommended by the TPO, the assessee submitted that the activity carried out in BPO is a non-technical activities carried out by under- graduates and graduates. The assessee in its TP analysis has relied on the comparative cases. The assessee had a margin of 15% and it was substantiated by comparative cases referred to in TP documentation. Whereas the TPO recommended a mark up of 30.21% as against 15% adopted by the assessee. The TPO treated the assessee as a company carrying on the business of software development and basically an export oriented unit. Assessee submitted that the TPO failed to appreciate that the assessee is mainly a domestic company which carried on the international transactions in a very minor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y picked 20 suitable companies only to justify its markup. The Transfer Pricing Officer has rightly pointed out that no filters have been applied by the appellant and that the results of companies so chosen are not really incredible. 4. The Transfer Pricing Officer has rightly stated that the appellant is mainly in IT enabled services. However, he has compared the results of the International Transactions of the appellant in part with some software developing companies. The appellant has not developed any software. 5. The appellant has pointed out that some of the facts mentioned by the Transfer Pricing Officer actually relate to some other companies and are not really relevant. This observation is partly correct. However, I find that the filters applied by the Transfer Pricing Officer are as follows: Companies whose data is not available for the FY 2006-07 were excluded. Companies whose IT enabled service revenue Rs 1 cr. Were excluded. Companies whose IT enabled service revenue is less than 75% of the total operating revenues were excluded Companies who have more than 25% related party transactions(income as well as expenditure combined) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ports Ltd This company is not considered as a comparable by the TPO for the current AY 2007-08 as the company has declining revenues for the last three year upto and including the FY 2006-07. 16.11 Apex Knowledge Solutions Pvt Ltd This company is considered as a comparable by the TPO even for the current AY 2007-08. 16.12 R Systems International Ltd (Seg.) This company is considered as a comparable by the TPO even for the current AY 2007-08. 16.13 Flextronics Software Systems Ltd (Seg.) This company is considered as a comparable by the TPO even for the current AY 2007-08. A plain reading of the above in this case reveals that the Transfer Pricing Officer has written certain things which are factually incorrect. There is no order in the case of the appellant under section 92CA for Asst. Year 2006-07. Obviously, the Transfer Pricing Officer has quoted this with reference to some other tax payer and not the appellant. The appellant has also categorically stated that there was no such order for the earlier year. 7. From the filters given above, I see that the Transfer Pricing Officer has excluded companies whose IT enabled service revenue is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts services do not relate to the services of the appellant. 11. As yet another example, Apex Knowledge Solutions Pvt. Ltd. is into GIS and engineering services and not into services offered by the appellant 5.3 From the above discussions, I find that whereas it is correct to say that the appellant has not taken all expenses Into account and has artificially shown 15% markup on selected cost. On the other hand, the Transfer Pricing Officer has applied incorrect filters and has compared the appellant's results with those of primarily incomparable companies. Therefore, I find that the calculation with respect to actual operating costs calculated by the TPO at ₹ 11,10,31,660/- are correctly calculated because such costs with respect to IT enabled services for exports are not very different from those of the appellant. These costs have also not taken into account any working capital adjustments as the appellant has stated that such an adjustment is not required. On the other hand, the margin of 30.21% is not correct. I hold that the margin of 15% of costs as taken by the appellant would be the correct margin. The cost would be ₹ 11,10,31,660/- as already stated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the grounds raised by the assessee are allowed for statistical purposes. 18. In the result, appeal of the revenue is dismissed and appeal of the assessee is allowed for statistical purposes as far as AY 2007-08 is concerned. ITA No. 49/H/13 for AY 2008-09 by the revenue and ITA No. 69/H/13 for AY 2008-09 by the assessee. 19. As regards ground Nos. 2 3 raised by the revenue regarding accrued income shown as unmatured advances amounting to ₹ 16,96,48,620/-, similar issue has been decided by us in AY 2007-08 in revenue s appeal. As the issue is materially identical to that of AY 2007-08, we uphold the order of the CIT(A) in deleting the said addition and accordingly, dismiss the grounds raised by the revenue. 20. As regards the ground Nos. 1 to 3( a to j) raised by the assessee regarding the addition of ₹ 7,25,22,986/- in respect of international transactions, in the previous year relevant to the assessment year, the assessee-company made certain international transactions pertaining to BPO services to associated enterprises viz. Monster Worldwide Inc., USA Monster Worldwide Ltd., UK and Monster SG Pte Ltd., Singapore. Hence, AO through letter dt.30.7.2010, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come arrived at by the AO. 27. In the result, appeal of the revenue is dismissed and appeal of the assessee is allowed for statistical purposes in AY 2008-09 is concerned. ITA No. 1333/H/14 for AY 2009-10 by the revenue and ITA No. 872/H/14 for AY 2009-10 by the assessee. 28. As regards ground Nos. 1 2 raised by the revenue regarding accrued income shown as unmatured advances amounting to ₹ 60,26,51,868/-, similar issue has been decided by us in AY 2007-08 in revenue s appeal. As the issue is materially identical to that of AY 2007-08, we uphold the order of the CIT(A) in deleting the said addition and dismiss the grounds raised by the revenue. 29. As regards the ground Nos. 1 to 3 ( a to g) pertaining to transfer pricing adjustment of ₹ 85,79,248/- u/s 92CA of the Act, by the assessee, it is observed that as per 3CEB report, the international transactions reflected are as under: AE Nature of transaction Amount (Rs.) Monster Worldwide Inc., Provisions of BPO services 8,67,01,622 Monster SG Pte Ltd., Singapore -do- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d it as under: Nature of transaction Amount (Rs.) Provision of BPO Services 10,46,49,393 Commission received 45,71,573 Commission paid 1,31,86,799 Reimbursement by AE 73,54,731 Reimbursement to AE 5,49,23,576 Sr. No. Nature of international transaction MAM PLI Margin of taxpayer Margin of comparables 1 Provision of BPO services CPM NA 15% NA 2 Commission received RPC NA 10% NA 3 Commission paid RPM NA 10% NA 4 Reimbursement by AE NA NA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices Ltd., 5) Genesis International Ltd., and 6) Infosyms BPO Ltd., 2. The lower authorities should have seen that these companies were held by the ITAT to be as not comparables in their order, in cases similar to or superior to the assessee company. 33. For determination of arm s length price, the TPO has selected the following companies as comparables: S.No. Company name PBIT/Cost (%) 1. Accentia Tech 49.40 2. Acropetal Technologies Ltd. (seg.) 25.01 3. Aditya BirlaMinacs Worldwide Ltd., 0.53 4. Cosmic Global Ltd. 48.20 5. Crossdomain 29.38 6. Eclerx Services Ltd. 53.34 7. Infosys BPO Ltd. 16.90 8. Jeevan Scientific/Softech Technology Ltd. 16.56 9. Microland Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... man 26 (Del), wherein it was held that huge turnover companies like Infosys and Wipro cannot be considered as comparable to smaller companies like assessee. 16.1 Even though we are not in agreement with the contentions of the comparability on turnover ratio of assessee with this company on the ground that assessee s turnover is about ₹ 129.8 crores, which as against turnover of ₹ 1016 crores of the Infosys, ( which is only about 5 times) we are of the view that other contentions with regard to the brand value and brand building exercise, having huge asset base, can be considered to arrive at the conclusion that Infosys is functionally not similar to that of assessee. Infosys BPO stands on its own as an exclusive BPO of the Infosys Technologies and in earlier years, generally Infosys BPO is excluded in many of the cases. Considering these aspects, we are of the opinion that even though the profits of the Infosys BPO Ltd. is reasonable and no super profits are earned, just because of its big brand value, this company has to be excluded on the grounds of functional dissimilarity on FAR Analysis. Therefore, we direct the Assessing Officer/TPO to exclude this company. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r is Geographic Information System services and at Sl. No. (vii) is Human Resources Services. No doubt, all these fifteen categories of products/services have been included under the major head of Information Technology Enabled Services (ITES), but most of them are quite distinguishable from others. In our considered opinion, the fifteen broad categories set out in this Circular cannot per se be claimed as similar to each other. A cursory look at these products/services transpires that some of them are functionally quite different from each other. Further the level of investment required for providing such services is also not consistent. In our considered opinion, the mere fact that two services are placed under this category do not become automatically comparable. If a case providing one category of services under ITES is claimed as comparable with another in the category of service under ITES as per this circular, then it must be shown ex facie that it is broadly similar. Adverting to the facts of the instant case, we find that the services rendered by Genesys fall under clause (vi) with the heading Geographical Information Systems Services , whereas those rendered by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erse nature of services and there was no segmental data for diversified service port folio. Moreover this company can be considered as KPO and we are of the opinion that this company is not comparable to assessee s services. We therefore, direct the Assessing Officer/TPO to exclude this company. (4) Cosmic Global Ltd. 19. The main objection of assessee with reference to the inclusion of this company is with reference to outsourcing of its main activity. Even though this company is in assessee s TP study, it has raised objection before the TPO that this company s employee cost is less than 21.30% and most of the cost is with reference to the outsourcing charges or translation charges, and as such this is not a comparable company. The TPO, though considered these submissions, rejected the same, on the reason that this does not impact the profit margin of the company. Opposing the view taken by the TPO, it is submitted that this company cannot be selected as comparable, as similar issue was discussed by the coordinate Bench of the Tribunal(Delhi) in the case of Mercer Consulting (India) P. Ltd. (supra), vide paras 13.2 to 13.3 which read as under- 13.2. Now coming to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les. In view of the detailed analysis of the coordinate Bench of the Tribunal in the above referred case, in this case also we accept the contentions of assessee and direct the Assessing Officer/TPO to exclude this comparable for the same reasons. 5) Acropetal Technologies Ltd. (seg.) 20. The objection of assessee with reference to this company is that the company is involved in engineering design services and high end services and has products in its inventory. It is also involved in R D activity and developing sophisticated delivery system. It was further submitted that this company is not functionally comparable at segment level also, as engineering design services are high end services, as considered in other cases. It is further submitted that allocation of expenses between segments is not possible and depreciation was not allocated between the segments. There are extra-ordinary events which impact profit also, as can be seen from the Annual Reports. It is further submitted that this company is not selected in the list of comparables selected in the case of Mercer Consulting (India) Pvt. Ltd. and therefore, selection of the company by the TPO in this case, whic ..... X X X X Extracts X X X X X X X X Extracts X X X X
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