TMI Blog2017 (5) TMI 1501X X X X Extracts X X X X X X X X Extracts X X X X ..... from this, it is also a fact that credit period extended to third parties is also same as provide to the AE, hence no adjustment is required to be made by treating it to be loan transaction and imputing interest on the delayed period receivables. Since similar facts and finding of Revenue authorities are permeating in this year also therefore, our finding given in the appeal for the AY 2011-12 would be squarely applicable and accordingly, this issue is decided in favour of the assessee. Foreign exchange gain or loss is operating in nature - Held that:- As already held that it is part of the operating income and therefore, it cannot be removed from the computation/working of the PLI. Accordingly, in view of the finding given in the appeal in the assessment year 2012-13, this issue too his decided in favour of the assessee. - ITA No. 6134/Del/2015, ITA No. 5829/Del/2015 , ITA No. 6572/Del/2016 - - - Dated:- 25-5-2017 - SHRI J.S. REDDY, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER Assessee by : Sh. S.P. Singh, AR, Sh. Manoneet Dalal, Advocate, Sh. Gaurav Bhutani, CA, Sh. Yishu Goel, Advocate Mrs. Pallavi Chopra, CA Revenue by : Sh. T.M. Shivakumar, CIT (D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ALP of the Appellant s international transactions with respect to the import of fixed assets as NIL, thereby resulting in the enhancement of total income by INR 4,805,127. 4. That on the facts and circumstances of the case and in law the Ld. AO/ Ld. TPO erred in treating delay in receipt of payment from the AE s, as unsecured loans advanced to the AE s and charging interest on the same. 5. That on the facts and circumstances of the case and in law the Ld. AO/ Ld. TPO erred in not examining the validity of initiation of penalty proceedings u/s 271 (1) (c) of the Act. 6. That on the facts and circumstances of the case and in law, the Ld. AO erred in charging and computing interest under section 234B and 234C of the Act. 3. The brief facts and background of the case are that Assessee Company was incorporated on May 12, 2010 as a subsidiary of BC holdings (UK) Limited with an objective to provide IT and Financial back office support services to various entities/ subsidiaries of its Parent Company all across the world. The assessee alongwith BC holdings (UK Limited) is a part of British Council which is an international organization based in UK, established for fosteri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tructure issues which are assigned to BCMS within the Global IT support model. Incident Resolution SAP: The resolution of second and third-line technical SAP issues which cannot be solved at the first line stage by the GSD under the SEAL contract is referred to BCMS or the UK. Business Relationship Management: To support the South Asia (SA), Middle East and North Africa (MENA) and Sub Saharan Africa (SSA) regions in delivery of their strategy, by ensuring that business solutions are fully aligned with business needs. As a member of the Global Business Solution Team, to ensure that future options and solutions are scalable and aligned to corporate strategy. Incident and Service Request Management. Problem Management. Knowledge Management. Change Management. Configuration Management: The Configuration and Release process is accountable for: IT Service Reporting. IT Service Management Governance. Service Level Management. Event Management. Technology Services Support Role. Procurement IT Operations Management 4. The learned TPO then carried out his own search process and after discussing the various filters appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gly, further adjustment of ₹ 5,25,938/- was made. 7. From stage of the learned DRP, first of all the TPO s action for adjusting the margin at 16.80% instead of 17.83% as declared by the assessee, has been upheld. The Ld. DRP removed one of the comparable selected by the Ld. TPO namely, Accentia Technology Limited and resultantly seven comparable companies have been confirmed by the DRP resulting into Arms Length margin of 27.98% and thereby adjustment was reduced marginally. 8. Before us, the learned counsel for the assessee submitted that so far as the first issue of transfer pricing adjustment of provision of Finance / IT back supports services is concerned, the assessee is mainly challenging the exclusion of three comparable companies, namely, (i) E-clerx Service Limited; (ii) TCS E-Serve Limited; and (iii) ICRA Technology Analytics Ltd. Besides this, the assessee is also challenging that foreign exchange gain / loss has not been treated as operating in nature by TPO as well as DRP. 9. Since, the learned counsel has argued only three comparable; therefore, our finding will be confined to these comparable companies only. He further pointed out that one of the DRP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... testing; and secondly, Sales Marketing services which also includes web content management merchandising execution, web analytics, etc. However, for these diverse activities segmental data is not available. These are very high-end services and forms part of KPO service portfolio. b. The learned has TPO failed to appreciate the fact that ITeS industry is completely different from KPO industry. c. E-clerx mostly operates through outsourcing model, that is, it outsources its major operation. d. He further submitted that in the proceedings before Hon ble DRP, one of the Hon ble member was in agreement with the assessee that E-clerx is a KPO company and should not be accepted as comparable to the Assessee. Finally in support of his contention, he strongly relied upon the following decisions: i. Actis Global Services Pvt. Ltd. (ITA 417/2016)-(AY 2010-11) ii. Actis Global Services Private Limited-ITA No. 6175/Del/2015-AY 2011-12. iii. Delhi High Court in case of Rampgreen Solutions Pvt Ltd (ITA 102/2015)-(AY 2008-09). 10.3 On the other hand, learned CIT DR after referring to the various functions performed by the assessee which has been incorporated by the TPO i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch situations as to how much value additions are there in deliverables in rendering of such kind of host of services. At the outset, on a perusal of the Financials and annual report of E-clerx for the relevant financial year as pointed out to us during the course of the hearing, we find that the E-clerx has outsourced most of its services to outsiders which is evident from the fact that the expenses under the head contract for the services is more than ₹ 43.71 Crores during the year out of total expenses debited to profit loss account of ₹ 91.29 Crores. The major operations appears to be based on outsource model, which is evident from the quantum of expenditure and notes to the financial account (the copy of which is appearing at page 840 of the assessee s paper book). In an outsourcing model, the assets deployed in the form of human resources, infrastructure and other intangibles differ from an entity which operates from its own resources. Whence, in the case of E-clerx, substantial work has been outsourced to various parties, as compared to the assessee, where the entire back office support services have been provided by the assessee itself, then on this ground a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its margin cannot be benchmarked with that of the assessee. 14. After considering the rival submissions and on perusal of annual report of ICRA Techno Analytics Limited, it is seen that following disclosures have been made: The company is engaged in the software development consultancy, engineering services, web development hosting and subsequently diversified itself into domain of business analytics and business process outsourcing. From the said note, it is clear that there cannot be any functional similarity between a company which is providing pure back office services and the company which is also engaged in software development and consultancy, engineering services, web development and providing business analytic and business process outsourcing. Thus, on functional level itself this cannot be held to be a comparable. Moreover, as pointed out by the learned counsel, there is no segmental information and bifurcation between ITeS and Software development. Accordingly, we direct the AO to exclude this company from the comparability list. (iii) TCS E-Serve Limited. 15. The learned TPO has included this company on the ground that services provided by the TC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yee cost base is more than 64 times that of the assessee. Further, its turnover is more than 67 times to that of the Appellant (i.e. 1,442.42 crores). i. In the recent case law of Baxter India Pvt. Ltd. (ITA No. 345/Del/2016) - AY 2011-12, the Hon ble Delhi Tribunal has excluded this comparable on the ground of functional differences and non- availability of segmental. j. In the case of Equant Solutions India Pvt. Ltd (ITA No. 1202/Del/2015), the Hon ble Delhi Tribunal has excluded TCS E-Serve as a comparable to ITeS provider for AY 2010- 11 on the ground that it carries on business of software testing, verification and validation for which no segmental bifurcation is available. Further, it owns huge intangibles and also uses Tata brand. Though the above decision is for AY 2010-11, the facts are equally applicable. 17. The learned counsel also submitted that the issue of comparability of TCS E-Serve vis-a-vis., the company providing ITeS services had come up for consideration before this tribunal in the case of Amri Price India Private Limited vs. DCIT, ITA No. 2010/Del/2014 and ITA No. 7014/Del/2014 wherein this company has been held not comparable with the ITeS compani ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ication on the other comparable will become purely academic, because the assessee s margin will fall within the tolerance range of + / - 5%. Hence we are not adjudicating the other comparables. 20. The next issue relates to, whether foreign exchange gain / loss is operating income or not while computing the operating margin. The assessee has computed its PLI after taking into account foreign exchange gain/ loss as operating in nature, whereas the TPO has considered as non-operating and therefore, he has tinkered with the computation of PLI of the assessee. The learned DRP too has confirmed the said action of the TPO. 21. Before us, the Ld. Counsel submitted that, since assessee is providing back office support services to its AE in UK and all its invoices are raised in GBP (Great Britain Pound), therefore, it alone undertakes such foreign currency risk. If the Indian entity makes payment to its AE at the prevailing exchange rate then it alone bears the exchange risk related to credit period, i.e., during the period between invoicing and recovery. In support, he strongly relied upon the decision of Delhi High Court in the case of Amri Price India Private Limited, ITA No. 206/2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opriate method by taking OP / TC as PLI, then depreciation on such an asset already stands considered as operating cost for rendering back office support services. The TPO as well as the Ld. DRP have proceeded to determine the ALP at Nil on the ground that the purchase are not supported by third party invoices and accordingly, the adjustments have been made. 25. Before us, the learned counsel, first of all rebutted the said finding of TPO and DRP by pointing out that the assessee has submitted all the necessary evidences before the TPO as well as the DRP in the form of copy of invoices to corroborate the Arm s Length character of imported equipment. In support, the assessee had also filed certificate from the management of British Council certifying that the fixed cost were imported on a cost to cost basis. Ld. Counsel further to controvert the finding and observations of the TPO DRP, drew our attention to various details furnished before the TPO appearing in the paper book from pages 386 to 449. In any case, he submitted that this transaction is tax neutral because, if the amount of depreciation is to be taken at Nil , then the amount of income to that extent should also b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or .............. . Section 92(1) stipulates that: `Any income arising from an international transaction shall be computed having regard to the arm's length price . The manner of computation of arm's length price is set out in section 92C. Sub-section (1) provides that the arm's length price in relation to an international transaction shall be determined by any of the methods given in the provision, being the most appropriate method, having regard to the nature of transaction or class of transaction etc. Amongst others, there is Comparable uncontrolled price (CUP) method and TNMM. The primary onus of proving that the international transaction is at ALP, is always on the assessee. 15.3. Reverting to the facts of the instant case, we find that the assessee applied TNMM as the most appropriate method for showing that this international transaction was at ALP. The TPO held that the correct method to be applied was CUP and as such the assessee was called upon to give uncontrolled comparable instances of the purchase of similar assets, which the assessee failed to do. This led th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned on CUP method, which is usually the most appropriate method in such circumstances. The TNMM on entity level cannot be applied, because the transaction of purchase of fixed assets can have no relation with the transaction of purchase of raw material from AE or sales of goods to AEs. Rule 10A of the IT Rules, defines `transaction as including `a number of closely linked transactions . The Hon ble Delhi High Court in its judgment of March, 2015 in Sony Ericsson Mobile Communications India Pvt. Ltd. has held that the related transactions should be considered jointly for determining their ALP. However, in order to consider more than one international transaction as one, it is sine qua non that such transactions must be closely and not remotely linked. Every transaction done by an enterprise is somehow or the other linked with the carrying on of the business. But in order to be eligible for processing two or more transactions jointly for determining their ALP, it is essential that they should be closely linked. If two transactions are not closely linked, then they cannot be considered jointly. Considering the above case of a manufacturer or a trader, it cannot be held that the trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of deduction for depreciation allowance and revenue due to depreciation in unison, the position which follows is that no further addition can be made on account of transfer pricing adjustment due to one-sided consideration of depreciation allowance at Nil. Rather, the determination of ALP of the international transaction of purchase of fixed assets, in the facts and circumstances of the instant case, is tax neutral. As such, we order for the deletion of addition made by disallowing or reducing the amount of depreciation on the assets purchased from AE. This ground is allowed. Though we have already held that the ALP cannot be determined at Nil , however following the principle and observation as discussed in the aforesaid decision, we also hold that being tax neutral transaction, no adjustment can be made by taking the value at Nil . Thus, this issue too is decided in favour of the assessee. 28. The last relates to treating the delay in receipts of payments from AE to be in the nature of unsecured loan advanced to the AE and thereby charging interest by taking SBI base rate and adopting the interest rate of 11.69%. Before us, one of the main contention of the learned c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lled transaction and comparable uncontrolled transaction, then there cannot be any adjustment, because in a situation like this, there is a direct CUP to analyse such transaction. Accordingly, the transfer pricing adjustment as made by the TPO by the imputing interest on delay in receipt of payment is uncalled for on the facts of the present case and same is directed to be deleted. 30. Now we will take up Revenue s appeal, wherein following grounds have been raised are as under: 1. The Ld. DRP has erred in law and on facts and in circumstances of the case in directing the TPO to reduce the amount to ₹ 2,59,64,962/- in place of ₹ 2,89,52,326/- which was added on account of Arm s Length Price to the taxable income of the assessee company. 2. The Ld. DRP has erred in law and on facts and in circumstances of the case in directing the TPO to exclude M/s Accentia technologies Pvt. Ltd. while ignoring the facts brought out by the TPO for including it as comparable being functionally similar to Taxpayer Company. 3. The Ld. DRP has erred in law and on facts and in circumstances of the case in rejecting the benchmarking of interest rate on the basis of SBI base rate f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trategic Tangent Corporation which was a software development company having expertise in development of software related to EMR and SaaS. d. Abnormal circumstances: Because of acquisitions between FYs 2007 and 2011, the revenues of Accentia have increased significantly. The Ld. TPO did not take this argument of the Assessee into consideration. e. Margin at overall entity level- The Ld. TPO has considered the profitability of Accentia at an overall entity level which includes income from software development and therefore, such an approach is incorrect when no segmental information is available. Thus, on the basis of such incomplete information a company cannot be considered to be a comparable company. 35. We have heard the rival submissions and also perused the relevant finding given in the impugned order. It is an undisputed fact that during the financial year 2010-11, Accentia acquired strategic Tangent Corporation which was a software development company having expertise in development of software relating to EMR SaaS. Due to this acquisition, the revenue of Accentia has been increased significantly and this factum as held by the learned DRP definitely is a very vita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perating in nature, while computing the operating margin; 4. That on the facts and in the circumstances of the case and in law, the Ld. AO/Ld. TPO/ Ld. DRP erred in making a notional adjustment of interest amounting to INR 649,897 on outstanding receivables by treating it as international transaction. The Ld. AO/ Ld. TPO/ Ld. DRP erred by: 4.1. treating delay in receipt of payment from the AEs, as unsecured loans advanced to the AEs and charging interest on the same; 4.2. applying an adhoc methodology for benchmarking the balances outstanding from related parties and in ignoring the fact that the balances had already been benchmarked by the appellant as part of the TNMM analysis performed by it; 4.3. Ignoring the fact that the appellant had earned higher operating profit margin than working capital adjusted margin of the comparable companies on its international transactions and hence any notional interest on the extended credit period provided to AEs was factored in the pricing of these transactions. 4.4. Ignoring the fact that a higher period of credit was received by the appellant from third parties. 5. That on the facts and in the circumstances of the case and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xt issue relates to transfer pricing adjustment on account of imputing the interest on outstanding receivables. Here in this year also, the fact remains the same that assessee is a debt free and it has neither received any interest from any creditors nor paid interest to debtors and no borrowed funds have been utilized for extending the time period of the receivables. Apart from this, it is also a fact that credit period extended to third parties is also same as provide to the AE, hence no adjustment is required to be made by treating it to be loan transaction and imputing interest on the delayed period receivables. Since similar facts and finding of Revenue authorities are permeating in this year also therefore, our finding given in the appeal for the AY 2011-12 would be squarely applicable and accordingly, this issue is decided in favour of the assessee. 41. Lastly, on the issue of whether the foreign exchange gain or loss is operating in nature, we have already held that it is part of the operating income and therefore, it cannot be removed from the computation/working of the PLI. Accordingly, in view of the finding given in the appeal in the assessment year 2012-13, this iss ..... X X X X Extracts X X X X X X X X Extracts X X X X
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