TMI Blog2017 (5) TMI 830X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest on receivables - Held that:- 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. A transfer pricing 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 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 impact on the working capital adjustment in any manner, but would call for addition on account of the late realization of invoice value for a period of six months. Following the orders in Ameriprise (2015 (8) TMI 652 - ITAT DELHI ) and Techbooks(2015 (7) TMI 473 - ITAT DELHI) we uphold the view taken by the TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... als and medical products, private equity et al. The assessee was established in February, 1999 to provide research and information services to McKinsey group of companies for assistance in their projects. The information is required to be given to queries placed by consultants, which is obtained by accessing various internet based databases, such as, Bloomberg, Reuters, One Source, Dow Jones, Dialong and Datastream. In the year 2004, the assessee also started providing IT support services to McKinsey group of companies. Two international transactions were reported by the assessee in Form No.3CEB for the year under consdieration, which include 'Provision for research and information services' to McKinsey Co. Inc., USA, currently under consideration, with transacted value of ₹ 1,36,09,15,539/-. The AO referred the matter of determination of the arm's length price (ALP) of both the international transactions to the Transfer Pricing Officer (TPO). The TPO noticed that the assessee used Transactional Net Margin Method (TNMM) as the most appropriate method for declaring its international transaction of 'Provision for research and information services' at ALP. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 'Provision for research and information services segment' at ₹ 27,33,96,137/-. The assessee is aggrieved against the addition to this extent. 4. We have heard the rival submissions and perused the relevant material on record. It is evident that there is no dispute on the selection of TNMM as the most appropriate method or the PLI of OP/OC etc. In fact, no other aspect of the TPO's order has been challenged except the inclusion of four new comparables introduced by the TPO, namely, Aditya Birla Capital Advisors Pvt. Ltd., ICRA Ltd., Birla Sunlife Asset Management Company Ltd. and Ladderup Corporate Advisory Pvt. Ltd. 5. Before embarking upon the comparability or otherwise of these companies, it is sine qua non to ascertain the correct nature of the operations carried out by the assessee under this segment. The TPO has recorded on page 2 of his order that the `Research and Analytics' services provided by the assessee under the instant segment include: (a) Knowledge on call; (b) Practice research; and (c) Analytics group, the detailed elaboration of which, as extracted from the Transfer pricing study report, is as under : - Knowledge on call group: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... segment has rendered data processing services which are in the nature of Business process outsourcing (BPO). This was countered by the ld. DR, who submitted that the assessee provided Knowledge process outsourcing (KPO) services to its AE and non-AEs and the contention of the assessee that it was merely collating data from the databases, was not correct. Referring to certain documents, he submitted that the work force of the assessee consisted of Researchers, Experts and Analysts. He also referred to the earlier Master Agreement for identical services, which indicated that there was a charge of US $ 1500 per day for Analytics manager. The ld. DR also took us through the extract from website of McKinsey group which, specifically, covers McKinsey Knowledge Centre, namely, the assessee. It has been shown that the assessee is: providing industry and functional expertise, advanced analytics, business research and proprietary tools and data . In the background of the portrayal of the assessee's nature of work, the ld. DR contended that the assessee was not mere collating data before onward transmission to McKinsey group companies, but, also conducting extensive research. He stated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tary in nature, requiring the assessee to pick up the relevant data from internet based databases. These services include financial analyses, fact packs, press search, document search, etc. A specimen of such services given by the ld. AR is a request made for providing off-the-shelf company profiles of certain companies, which the assessee compiled, organized into templates in Excel, Power Point etc. and then transmitted outside India as its output. 12. Services under 'Practice research' are focused on domain specific research support collating data of a particular line of business as requested, compiling and then sending after necessary conversion in to the desired format. The information given under this sub-group is sector data and analyses, capital market insights, perspectives and industry trends. A specimen of such services given by the ld. AR is a request made by Roger Rouhana seeking details about private banking players in Asia, to which the assessee furnished the details by mentioning that: it did an exhaustive press search to gauge which all banks have commitments to expand Private banking business in Asia and brief on what they intend to do. Bank-wise descr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the help of so many researchers, specialists and analysts. 16. The matter does not end at mere designations of its work force. It is further noticeable that in the earlier year also the assessee was rendering similar services when the charge was on per diem basis. The assessee charged for Analytics manager at 1500 US $ per day for seven hours, Team leader/Expert at 850 US $ per day for seven hours, Project leader/Analytics specialist at 750 US $ per day for seven hours, Sr. Analyst at 600 US $ per day for seven hours, Analyst at 500 US $ per day for seven hours and Junior Analysts at 375 US $ per day for seven hours. Such huge amounts charged for Analytics manager, Team leader/Expert and Project leader/Analytics specialist, etc. do not justify the assessee's stand of accessing data or conducting a research of casual nature. 17. The ld. AR placed a great deal of emphasis on the stand of the AO on the nature of services rendered in denying deduction u/s 10A and on the nature of services at the time of selecting comparables. He invited our attention towards the fact that the AO in earlier years, while considering similar services, denied the benefit of deduction u/s 10A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ld. AR in its paper book. It can be seen from the tribunal order, that the AO denied deduction by holding that the services undertaken by the assessee were not I.T. Enabled Services as the added value for customer was not generated, least significantly, through the use of information and communication technologies using network software. The assessee was found to have used network software only to send customized date electronically on Excel sheet, Power point, etc. The AO observed that there was no value addition through the network software which is most vital aspect for determination of service as I.T. enabled service or otherwise. He further noticed that the use of network software in the case of the assessee was limited only for the purpose of transmission of customized date to its parent company. The assessee, inter alia, contended in first appeal, as has been reproduced on page 5 of the tribunal order, that the assessee, after receiving the request was collating the information from specialized data sources/data bases. `(d) The data was then customized/processed in accordance with the requirements of the requestor; (e) The customized/processed data was then organized into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oup companies. It is overt that the AO's stand on the assessee doing no value addition to the data sourced from databases, has been jettisoned. All the appellate authorities up to the Hon'ble High Court have approved the assessee's viewpoint of value addition made by the assessee by undertaking series of operations to the data received form various databases before finally delivering to the customer. 22. It is thus established that the assessee is carrying on research from the internet based databases or other sources to compile the data, which is then customized/processed in accordance with the requirements of the requestor through a series of operations carried out by its Research Managers, Knowledge Experts, Practice Specialists and Senior Research Analyst etc. before finally transmitting it outside India after organizing into templates in Excel, Power Point etc. Thus, it is evident that the assessee is making value addition to the information accessed by it from databases etc. When we apply the requisites of KPO to the services rendered by the assessee under this segment, there remains hardly any doubt that the assessee is rendering KPO services under this segmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable to company 'B', it may still be comparable to company 'C'. Despite the fact that company 'A' is functionally similar to company 'B', it still might have been declared as incomparable to company 'B' because of other relevant reasons. If company 'A' passes the same reasons vis-a- vis company 'C', then company 'A' will find its place in the list of comparables of company 'C', notwithstanding the fact that it was held to be incomparable to company 'B'. The crux of the matter is that the mere fact that company 'A' has been held to be not comparable in a judicial order passed in the case of company 'B', does not per se make it incomparable in all the subsequent cases to follow. Not only company 'A' held to be incomparable to company 'B' can be comparable to company 'C', but company 'X' held to be comparable to company 'Y' can also be incomparable to company 'Z', depending upon the functional profile and the applicability or otherwise of the related factors. Thus, it is clearly deductible that if a particular company has been held to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... objection was rejected and the same was finally included in the final tally of comparables. 27.2. Having heard both the sides and perused the relevant material on record, it is found that this company, as noted by the TPO on page 22 of his order, is : the investment manager of Birla Sun Life Mutual Funds, is a joint venture between the Aditya Birla Group and the Sun Life Financial Inc. of Canada. The TPO has further recorded that this company is managing assets of large investor base with solutions offering a range of investment options including diversified sector specific equity schemes. Page 280 of the paper book is a copy of Profit Loss Account of this company which describes its revenue as: Management and Advisory Fees, Portfolio Management Fees, Real Estate Management Fees and Investment Income. It is further pertinent to note from page 287 of the paper book that this company is registered with SEBI as an Investment manager to Birla Sun Life Mutual Fund. Apart from rendering these services, this company has also its own investment portfolio from which dividend has been received and it has also earned profit on sale of investments, depicted on page 281 of the paper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the list of comparables. 29.2. Having heard the rival submissions and perused the relevant material on record, we find from the TPO's order page 26 that this company: provides one-stop financial advisory and fund raising solutions in Investment Banking, Capital Markets, Wealth Management Project Finance and Growth stage investing. Profit Loss Account of this company, copy placed on page 469 of the paper book, shows Operational income of ₹ 11.18 crore whose description has been given in Schedule 11 as: Financial and Management Consultancy Fees. The ld. AR has placed on record an extract from the website of this company, which shows that on July, 22, 2010, being a period relevant to the year under consideration, this company: received a Category-1 Merchant banking registration from the Securities and Exchange Board of India. On an overview of the nature of business carried out by this company, it is manifest that the same is absolutely different from the assessee's research services. We, therefore, order for the exclusion of this company from the list of comparables. 30. The ld. DR vehemently argued that the companies considered by the TPO are broad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e not being challenged in its appeal and secondly, for the exclusion of the two companies which were earlier accepted by the TPO as comparable. 34. We are inclined to accept the request of the ld. DR about his entitlement to raise a fresh issue de hors no formal application under rule 27 of the ITAT Rules, 1963 or such a ground not taken in the departmental cross appeal. An oral request can be accepted as a substitute of a formal application. Delhi bench of the tribunal in ITO vs. Gurinder Kaur (2006) 102 ITD 189 (Del), following Hukumchand Mills Ltd. vs. CIT (1967) 63 ITR 232 (SC), has held that even without rule 27, it is open to the respondent in an appeal before the Tribunal to raise a new ground in defence of the order appealed against. 35. Now, we espouse the contention of the ld. DR for the exclusion of two comparables companies chosen by the assessee and approved by the Officer in the proceedings. The TPO, as per the ld. DR, accepted the same notwithstanding the fact that these were not functionally strictly similar. We do not approve such a stand of the Revenue. Once TPO expressly accepts a company with low margin as comparable vis-a-vis the assessee's high margi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplication of mind. Unlike the first situation, in which the TPO was not fair to correct the assessee's mistake in including a wrong company as comparable, entitling the assessee to seek redressal of its grievance before the tribunal, in the second situation, the TPO explicitly accepted a company after having full opportunity of examining the assessee's mistake in including a wrong company as comparable. Now, if the TPO has supposedly done some wrong, the DR cannot assume the role of a TPO to point out that the later should not have done this or that and hence it may be corrected before the tribunal. There is appropriate compartmentalization of the powers and limitations of the authorities under the Act. No one can usurp the power of another, even if he is senior in rank. Role of DR, in an appeal by the assessee, is limited to defending the order of the AO. He cannot do what the TPO could have done but failed to do. The Hon'ble Bombay High Court in CIT vs. Maersk Global Service Centre (I) Pvt. Ltd. vide its judgment dated 22.8.2014 in ITA No. 692/693 of 2012 has upheld the view taken by the tribunal in not allowing the Revenue's representative to travel beyond the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... back to the AO/TPO for redetermining the ALP of the international transaction under this segment by considering M/s Samsung as an internally comparable uncontrolled transaction. 40. He explained the second aspect that the assessee was showing higher profit in earlier years in respect of its Gurgaon STP unit because of the availability of the deduction u/s 10A. The Agreement with its AE for remuneration on per diem basis, which was prevalent up to the last year was giving handsome returns. He submitted that the period of deduction from Gurgaon unit expired in the last year and that is the reason for the assessee converting to a new model of remuneration of cost plus 15% from this year onwards. Such new method was claimed to have resulted into shifting of income from India vis- -vis the earlier years. It was argued that the assessee resorted to tax avoidance by changing the model of remuneration. Relying on Mcdowell Co. Ltd. vs. CTO (1985) 154 ITR 148 (SC), the ld. DR urged that the assessee's attempt to thwart the payment of legitimate taxes in India should be put to rest. Taking support from the definition of `international transaction' as given in clause (e) of Explan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions is to ensure that the assessee in India declares price/profit in/from an international transaction which is compatible with the price/profit rate declared by unrelated parties in a comparable uncontrolled situation. Object of section 92, as it transpires from its language, is that any income arising from an international transaction should be computed having regard to the arm's length price. This provision is not aimed at maximization of chargeable profit from an international transaction. Notwithstanding the fact that the assessee earned more profit in earlier year, there can be no transfer pricing adjustment in a later year so long as the international transaction is at ALP. Rule 10B of Income-tax Rules, 1962 provides, under all the methods, to determine the ALP with reference to the price/profit of comparable instances for the current year alone. Law nowhere enjoins for determining the ALP w.r.t. the price/profit of the earlier years. What is required to be seen is to check the price charged or profit earned by comparables in uncontrolled transactions during the year and then compare it with the price charged or profit earned by the assessee from its international ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is no dispute about the existence of such an international transaction of `Research and Information Services', which is instantly under consideration. This contention is also, ergo, repelled. 47. In view of the foregoing discussion, we are of the considered opinion that notwithstanding the argument of the ld. DR of functionally dissimilarity, the two companies as included by the assessee and approved by the TPO as comparable, cannot be excluded on the request of the ld. DR. The AO/TPO is directed to determine the ALP of the international transaction of `Research and information services' in accordance with the above discussion. B. INFORMATION TECHNOLOGY SUPPORT SERVICES 48. The assessee reported another international transaction of 'Provision of Information Technology support services' to McKinsey Co. Inc., USA with transacted value of ₹ 6,74,54,761/-. The assessee used TNMM as the most appropriate method with PLI of OP/OC. 14 companies were selected as comparable with average margin of 17.13%. The assessee's own margin at 15.40% was shown to be at ALP. The TPO made certain inclusions and exclusions in/from the list of comparables drawn by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s like server problems, hosting of Notes databases, problems with documents in the Notes databases. 52. The ld. AR while arguing Research and Information Services submitted that only information/research related products and services from the preamble part are covered under `Research and information services' and the remaining part pertains to IT Support Services, namely, `assistance in the development, maintenance and service software,... assistance with respect to knowledge management systems and infrastructure related issues like server problems, hosting of Notes databases, problems with documents in the Notes databases'. 53. We have also reproduced above Clause 1 of the Master Services Agreement defining the nature of work, with the caption : `Engagement of McKC'. While arguing the segment of Research and Information Services , the ld. AR submitted that only information/research related products and services covered under Clause 1(a) are relevant for `Research and information services' segment and the remaining part of clause 1(a) and whole of the clause 1(b) pertains to `IT support services'. Therefore, it is deducible that the nature of servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed a reasonable opportunity of being heard in this regard. C. INTEREST ON RECEIVABLES 56. The next issue raised by the ld. AR is against the transfer pricing adjustment on account of interest on receivables. Briefly stated the facts of the case are that 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 explain that why the delayed payments be not treated as unsecured loans advanced to the AEs, the assessee submitted that it was not an international transaction warranting benchmarking. The TPO rejected this contention and held that interest was chargeable at arm's length level in respect of delayed receipt of invoice values. The DRP affirmed the view of the TPO, against which the assessee has come up in appeal before us. 57. The ld. AR submitted at the outset that the Delhi bench of the tribunal in Ameriprise India Pvt. Ltd. vs. ACIT in ITA No.2010/Del/2014 (authored by the AM of this order) has held such interest on receivables as an international transaction. He submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered in the course of carrying on the business. Once any debt arising during the course of business has been ordained by the legislature as an international transaction, it is, but, natural that if there is any delay in the realization of such debt arising during the course of business, it is liable to be visited with the TP adjustment on account of interest income short charged or uncharged. Thus, the contention taken by the assessee before the TPO that interest on receivables is not an international transaction, was found by the Bench to be bereft of any force. 60. We find that 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 excess period of credit to the associated enterprises without charging an interest during such credit period would not amount to international transaction whereas section 92B(1) of the Income-tax Act, 1961 refers to any other transaction having a bearing on the profits, income, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h is subject matter of the international transaction of purchase/sale of goods. There is one more fallacy in the argument 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. A transfer pricing 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 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 impact on the working capital adjustment in any manner, but would call for addition on account of the late realization of invoice value for a period of si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 67. In the context of transfer pricing, the Bangalore Bench of the Tribunal in SAP Labs India Pvt. Ltd. Vs ACIT (2011) 44 SOT 156 (Bangalore) 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) 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. 68. The reliance of the ld. DR on Safe Harbour rules to contend that foreign exchange gain or loss be taken as non-operating, is not sustainable. There is no doubt that in such rules, forex gain/loss has been treated as non-operating. However it is relevant to note that such rules are not applicable to the assessment year under consideration. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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