TMI Blog2018 (4) TMI 82X X X X Extracts X X X X X X X X Extracts X X X X ..... 43(3) r.w.s. 144C of the Income-tax Act, 1961 [hereinafter referred to as the Act ] dated 30/11/2016 for the Assessment Year 2012-13. 2. Briefly, the facts of the case are that the assessee is a company incorporated under the provisions of the Companies Act, 1956. It is wholly owned subsidiary of XL Health Corp. It is engaged in the business of rendering software development and ITES and IT services to XL Health Corp. It is stated that the appellant is remunerated on cost + mark up basis. 3. The return of income for the assessment year 2012-13 was filed on 27/11/2012 declaring a total income of ₹ 4,75,85,020/-. The assessee-company also reported the following international transactions with its Associated Enterprises (AE) in 93CE report: Amount Software Development, Software Solutions, Back office Operations IT Consulting 39,18,46,257/- Reimbursement of Expenses 5,13,14,609/- 4. The assessee-company sought to justify the consideration received for the international transactions entered with its AE to be at arm s length price [ALP]. The assessee- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nies who have more than 25% related party transactions of the sales were excluded. vi. Companies who have export service income less than 75% of the sales were excluded. vii. Companies with employee cost less than 25% of turnover were excluded. 7.1 Applying the above filters, the TPO rejected Fortune Infotech Ltd. and R Systems Internationals, out of 8 comparables selected by the assessee-company and accepted the balance 6 comparables selected by the assessee-company and finally selected the following 10 comparables: SI. No. Name of the Case Operating Income Operating Cost OP/OC 1 Accentia Technologies Ltd. 126,38,02,000 112,89,16,000 11.75 2 Universal Print Systems Ltd.(Seg) (BPO) 6,17,67,000 3,87,49,000 52.46 3 Informed Technologies India Ltd. 1,96,36,431 1,82,45,770 6.08 4 Infosys B P 0 Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the draft assessment order, objections were filed before the Hon ble DRP contending inter alia the selection of comparables as well as disallowance of depreciation on royalty. The ld. DRP, after duly considering the submissions of the assessee-company confirmed the findings of the TPO. After receipt of directions from the Hon ble DRP, the AO passed final ast. order u/s 143(3) r.w.s 144C (13) of the Act. 9. Being aggrieved, the assessee-company is before us in the present appeal. The assessee raised the following grounds. 1. That, the final assessment order framed by the learned Assistant Commissioner of Income-tax, Circle 7(1)(2), Bangalore (hereinafter referred to as 'the learned AO') pursuant to the directions of the Hon'ble Dispute Resolution Panel - II (hereinafter referred to as 'the Hon'ble DRP') under section 143(3) read with section 144C of the Income-tax Act, 1961 ('the Act'), is a vitiated order having been passed in violation of principles of natural justice and is otherwise arbitrary and is thus bad in law and is void ab-initio. 2. That, without prejudice, the learned AO has grossly erred in making a transfer pricing additi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pper turnover filter. 8. That on the facts of the case and in law, the learned TPO / Hon'ble DRP has erred in treating provision for bad and doubtful debts and bank charges as non-operating items while determining the arm's length price of the impugned international transaction of the Appellant. 9. That on the fact of the case and in law, the learned TPO / Hon'ble DRP has erred in not allowing a risk adjustment to the Assessee on account of the fact that the Appellant is a captive service provider for its associated enterprises and is remunerated on a cost plus basis irrespective of the outcome of the services provided and hence undertakes no market risk, service liability risk, credit and collection risk as against comparable companies that are the full-fledged risk taking entrepreneurs. 10. That on the facts of the case and in law, the learned TPO/ Hon'ble DRP has erred in selection of functionally noncomparable companies and rejection of comparable companies, as per provisions of Rule 10B(2), for the purpose of determination of ALP of the international transaction pertaining to IT enabled services rendered by the Appellant. 11. That on the fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13.2, on the facts and in the circumstances of the case and in law, the learned AO/ Hon'ble DRP have erred in not appreciating that retrospective amendment to the definition of royalty cannot be held as a ground to hold that the assessee should have deducted tax at source from payments made prior to insertion of the amendment (doctrine of impossibility of performance). 13.2.2 That, without prejudice, on the facts and in the circumstances of the case and in law, the learned Hon'ble DRP has erred in holding that 'the amount paid to obtain computer software cannot be added to the block of assets of computer as the nature of payment for computer software is that of Royalty; and since computer software no longer remains part of the block of assets, so depreciation claimed on it needs to be disallowed'. 14. That on the facts of the case and in law, the learned AO has erred in not allowing set off of MAT credit of INR 63,00,690 under section 115JAA of the Act which was brought forward from earlier year(s). 15. That on the facts of the case and in law, the learned AO has erred in computing interest under section 234B of the Act. 16. That on the facts of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at major revenue is from Knowledge outsourcing process activities. It was further contended that it was a technology solution provider and it was also contended that this comparable this entity owns intellectual properties and possess high brand value and also it is a giant company and therefore cannot be compared with that of the assessee company. As this assesseecompany does not own any intangibles or brand value and it provides only full technical administrative services for delivery of services whereas the assessee-company provides a very low end BPO services to its AE. However the above observations have been turned down by the TPO by holding as under. The company performs functions which are comparable to the taxpayer's and further, brand does not fetch profit margins, it only increases the revenue. Secondly, size does not matter in software/ITES industry which is only employee driven and not capital driven. TPO relies on the judgement of Hon ITAT in the case of Capgemini India Pvt. Ltd., (ITA No.7861/Mum/2011). The taxpayer has relied on various judgements of Hon Tribunals holding that Infosys BPO is not comparable in specific cases. These decisions are rendered i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e record and not merely on the basis of precedent and only after a FAR analysis of the comparables and the tested party on the issue of functionality he submitted that only a broad functionality is required to be examined. The ld. DR also submitted that knowledge process outsourcing is also part and parcel of business process outsourcing solutions where, apart from process of data, knowledge also applied. v) We heard rival submissions and perused the material on record. The rival submissions and perused the material on record. From the perusal of the Annual Report of this Infosys BPO Ltd. placed at pages 464 to 582, at page no. 482 it is stated as under. The company is committed to providing best-in-class services to both horizontal and vertical focus areas. Horizontal solutions comprise of Sourcing and Procurement, Customer Service, Finance Accounting, Knowledge Services, Human resources, while Vertical (Industry) solutions include Banking Capital Markets, Communication Media Entertainment, Manufacturing, Emerging Market Solutions, Insurance Healthcare, Retail, Energy, Utilities Resources, Automotive Aerospace, Transportation Services. We believe in continuou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith reference to service/product characteristics. This factor cannot be undermined by using a broad classification of ITeS which takes within its fold various types of services with completely different content and value. Thus, where the tested party is not a KPO service provider, an entity rendering KPO services cannot be considered as a comparable for the purposes of Transfer Pricing analysis. The perception that a BPO service provider may have the ability to move up the value chain by offering KPO services cannot be a ground for assessing the transactions relating to services rendered by the BPO service provider by benchmarking it with the transactions of KPO services providers. The object is to ascertain the ALP of the service rendered and not of a service (higher in value chain) that may possibly be rendered subsequently. The Hon ble High Court reversed the decision of the Special bench of this Tribunal in the case of Maersk Global Centers (India) Pvt. Ltd. v. ACIT, ITA 7466/Mum/2012. vii) Thus, having regard to the decision of the Hon ble Delhi High court in the case of Rampgreen Solutions (P.) Ltd. Vs. CIT (supra), the entity Infosys BPO Ltd. cannot be compared with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Ltd. Vs. ACIT (supra). iii) On the other hand, the ld. CIT (DR) made same submissions as made in the case of Infosys BPO Ltd. (supra). We have heard the rival submissions and perused the material on record. From the perusal of the Annual Report of this entity placed at page nos. 583 to 678 of paper book, at page no. 604 it is stated as under. 2. COMPANY OVERVIEW Your Company, along with its subsidiary companies - TCS e- Serve International Limited and TCS e-Serve America Inc., is primarily engaged in the business of providing Business Process Services (BPO) for its customers in Banking, Financial Services and Insurance domain. The Company's operations include delivering core business processing services, analytics insights (KPO) and support services for both data and voice processes. Your Company is an integral part of the Tata Consultancy Services' (TCS) strategy to build on its 'Full Services Offerings' that offer global customers an integrated portfolio of services ranging from IT services to BPO services. The Company provides its services from various processing facilities, backed by a robust and scalable infrastructure network ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ched with this order. (Annexure-G) The TPO has used only current data for the F.Y 2011-12. The corrected margin is 52.46%. The Hon ble DRP also confirmed the findings of TPO. ii) Being aggrieved, the assessee-company is before us. It is contended by the assessee that this company fail revenue filter more than 75% from ITES segment and also functionally not comparable with that of the assessee-company and also fails the filter of earnings from export against 75% of the total revenue and also fails the employee cost filter as employee cost is only 18.56% of the sales. iii) We heard the rival submissions and perused the material on record. We have perused the Annual Report of this company placed at pages 352 to 463 of paper book. From the page no. 354 it is stated as under. In 2011-12, Your Company faced many challenges ranging from historically steep fuel price increases, non-availability of power throughout the year and high raw material costs. The Labels and Offset divisions in particular were negatively impacted due to non-availability of power. Tamil Nadu on the whole, faced drastic power outages and restrictions, which were mainly directed at industri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s is only 42.91% and also fails the RPT filter of 25% applied by the TPO as the RPT in this case is 49.60%. These objections have been over ruled by Hon ble DRP by holding that mere fact that the company is a high profit making ipso facto cannot be a reason to exclude from the list of comparables. As regards the export earning filter, the Hon ble DRP held that the TPO has considered the segmental data only, entire receipts are from exports. As regards the RPT filter, the DRP rendered a categorical finding that there are no transactions with the AE in respect of medical transcription services. Thus the DRP confirmed the findings of the TPO. iii) Being aggrieved, the assessee-company is before us. The learned counsel, again reiterated the same submissions made before the DRP but had not laid any evidence on record confronting the findings of the DRP. From the Annual Report filed before us placed in the paper book at page nos. 679 to 728, on page no. 689 it was stated as under. 3. Operations and Overview: During the year under review your company has achieved a gross turnover of ₹ 36,302,498 as against the turnover of ₹ 10,766,512 of the previous year regist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts, so the company passes the export revenue filter. So the objection of the assessee is without any merit and the same is not accepted. As regards employee cost filter, the TPO had used the information called for u/s 133(6) of the Act and the employee cost was found to be more than 25%. The assessee has also argued that the current year of this company was exceptional, as management decided to close down the business, there was steep reduction in profits and company entered into new line of business and made some investments in an Infra company. The above submissions of the assessee have duly been considered. As regards the closing down of the existing business. the management had taken such decision to close down the business in future. So how it has impacted the present business of the assessee could not be explained by the assessee. Similarly, how starting of a new line of business has effected the ITES segment especially when TPO has used segmental data of this company in the case of assessee, could also not be explained by the assessee. So the objection of the assessee in relation to this comparable is also not accepted. ii) Being aggrieved, the assessee-company is befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cessarily mean selection of companies having financial year from April to March and reliance in this regard was placed on these two decisions. a) CIT Vs. Mckinsey Knowledge Centre India Pvt. Ltd. in ITA No. 217/2014, High Court of Delhi b) Baxter India (P.) Ltd. Vs. ACIT (supra) The prescribed rules for comparability postulate that contemporary data financial year ending is appropriate filter. The appropriateness of this filter was not challenged before the TPO. The DRP also upheld the validity of application of this filter. Therefore we do not find any reason to include this company in the list of comparables. Similarly in the case of Caliber Point Business Solutions Ltd. also the reasoning given was in respect of R Systems International Ltd. equally holds good. Therefore we uphold the exclusion of Caliber Point Business Solutions Ltd. from the list of comparables. c) Informed Technologies Ltd.:- This company was included by the assessee-company in its TP study but rejected by the TPO on the ground that the financial statements are unreliable, no segmental data was available and other income constitute 48% of total operating income etc. Before Hon ble DRP also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this company reads as follows. (iii) In respect of loans, either granted by the Company, secured or unsecured to/from companies, firms or other parties covered in the register maintained under section 301 of the Companies Act 1956. A In respect of an unsecured loan (including advances) granted in the earlier years to one company covered in the register maintained under Section 301 of the Companies Act, 1956: ( a) The maximum amount outstanding during the year was ₹ 74,55,954 (previous year ₹ 74,55,954) and the year end balance was Rs. Nil, as the same has been written off during the year. (b) The terms and condition of the said loan (including advance) seems, prima facie, prejudicial to the interest of the company as the company has granted the same interest free. (c) In the opinion of the management, the loan is irrecoverable now as name of the company has been struck off from the Registrar of Companies on 13 th May, 2011. Attention is invited to note no.15 in this regard. --------------------------------------------------------------- -------------------------------------------------------------- -------------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of M/s. Vogue Vestures Pvt. Ltd. Vs. DCIT in ITA No. 1199/Bang/2016 dated 26.12.2017 wherein it was held as under. 7. We heard rival submissions and perused the material on record. The issue in present appeal is whether the provisions of section 40(a)(ia) are applicable to the purchase of capital assets. Undisputed facts of the case are that the assessee has purchased software which is capitalized in the books of account and claimed depreciation thereon. The Assessing Officer denied depreciation holding that the assessee had failed to deduct tax at source. This issue is now covered by the decision of the Hon'ble Punjab Haryana High Court in the case of CIT vs. Mark Auto Industries Ltd.(2013) 40 taxmann.com 482 (P H) wherein the Hon'ble High Court held that in absence of any requirements in law for making deduction of tax at source on expenditure incurred on technical know-how which was capitalized, disallowance under the provisions of section 40(a)(ia) cannot be made. The relevant paragraph of the judgment is as under: 5. Adverting to questions (ii) and (iii), the issue which arises for consideration is whether the assessee could be disallowed claim for d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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