TMI Blog2018 (8) TMI 1201X X X X Extracts X X X X X X X X Extracts X X X X ..... AMBLE, JUDICIAL MEMBER For The Assessee : Shri Himanshu Sinha, Adv And Shri Bhwan Dhoopar, Adv For The Revenue : Shri H.K. Choudhary, CIT- DR ORDER PER N.K. BILLAIYA, ACCOUNTANT MEMBER:- This appeal by the assessee is preferred against the order of the DRP -1, New Delhi dated 24.09.2015 framed u/s 144C(5) of the Income-tax Act, 1961 [hereinafter referred to as 'the Act' for short] pertaining to A.Y 2011-12. 2. This is the second round of litigation. In the first round, the matter travelled upto the Hon'ble High Court of Delhi. Following substantial question of law was admitted by the Hon'ble High Court: Whether the ITAT erred in ordering a de novo determination of the Arms Length Price by the Transfer Pricing Officer upon a fresh benchmarking? 3. The relevant findings of the Hon'ble High Court read as under: 17. Consequently, the question framed by this Court is answered in the affirmative by holding that the ITAT ought not have remanded the matter to the TPO for the de novo determination of the ALP of the international transactions in the various segments. This exercise should be performed by the ITAT itself. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. Summary of economic analysis in the TP study can be understood from the table below Nature of International Transaction Amount (In INR crores) (Refer page no. 372 of paper book) Most Appropriate Method and Profit Level Indicator ( PLI ) (Refer page no. 321 of paperbook) Arm s length results Appellant s PLI (Refer page no. 321 of paperbook) Margin of comparables in TP study1 (Refer page no. 321 of paperbook) Updated margins (Refer page no. 13 of paperbook) Provision of EDS 131.40 Method: TNMM PLI: OP/TC 10.84% 13.41%2 12.57% Provision of FAS services 5.05 Method: TNMM PLI: OP/TC 10.52% 14.61%3 8.54% Provision of IT Infra services 14.98 Method: TNMM PLI: OP/TC 14.32% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. 29.45 Average 30.19 10. In the FAS, the following comparables were adopted by the TPO: Not Company Name OP/TC % 1 Accentia Technologies Ltd. 29.18% 2 Acropetal technologies Limited(Seg) 14.36% 3 e4e Healthcare Business Services Pvt. Ltd 9.77% 4 Eclerx Sendees Ltd. 56.82% 5 Infosys BPO Ltd. 17.86% 6 Jindal Intellicom Ltd. 13.70% 7 TCS E-Serve Ltd. 69.31% 8 Microgenetics Systems Ltd -3.20% Average 25.98% 11. In the IT Infra, the following comparables were adopted by the TPO: S. No. Company Name OP/ TC (%)* ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... FAS - 21.57% IT Infra - 1 8.06% 14. Further, the TPO did not allow the benefit of economic adjustments, i.e., working capital and risk, while computing the arms length margins of the respective segments of the company. The TPO also made an adjustment on account of period of delay in receipt of payments from AEs. The TPO imputed an Indian based interest at the rate of 10.84% p.a. for the period of delay in receipt of payments from AEs beyond 60 days. 15. Final adjustment made by the TPO can be understood from the following chart: S. No. Nature of international transaction Tested Party s margin as per segmental redrawn by the Ld. TPO Arm s length margin determined by Ld. TPO Adjustment u/s 92CA 1 Provision of EDS 8.98% 30.19% 27,39,32,965 2 Provision of FAS services 10.52% 25.98% 70,84,259 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ical Financial Consultants Ltd 10.63% 10 Mahindra Consultants Engineers Ltd 30.32% 11 Mitcon Consultancy Engineer Services Ltd 43.58% 12 R E C Power Distribution Co. Ltd. 31.00% 13 Rites Ltd. 58.27% 14 Usha Hydro Dynamics Ltd 25.40% 15 Arvind Accel Ltd. 2.47% Mean 27.56% FAS Service Segment Sl. Company Name WC adjusted 1 Accentia Technologies Ltd 27.27% 2 Acropetal Technologies Ltd (Engineering 14.36% 3 e4e Healthcare Business Services Pvt Ltd 10.96% 4 Eclerx Services Ltd 56.6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 19. We will first take up EDS Segment. SEGMENT I EDS SEGMENT 20. The ld. counsel for the assessee strongly submitted that the following comparables deserve to be excluded from the final comparables set: (i) Kitco Ltd (ii) TCE Consulting Engineering Ltd (iii) Certification Engineering International Ltd (iv) Global Procurement Consultants Limited (v) IBI Chematur [Engineering Consultancy Ltd] (vi) Mitcon Consultancy Engineering Services (vii) REC Power Distribution Co. Ltd (viii) RITES Limited (ix) Usha Hydro Dynamics Ltd. 21. We will take up each comparable one by one. (i) KITCO LIMITED 22. The profile of this company shows that it is a 100% Government owned undertaking rendering services primarily to Central/State Government undertaking and PSUs. Most of the clients or projects undertaken by this company are either for state government or government run institutions. Therefore, the majority revenue of this company comes from government /state or centre run projects and the company derives benefit out of its parental relation with the Government in getting contract and because of this, the profit margins of this co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... direct to exclude KITCO from the final set of comparables. (ii). TCE CONSULTING ENGINEERS LTD 25. Profile of this company shows that it is involved in activities beyond engineering design extending from concept to commissioning whereas the assessee provides services as a captive unit to its overseas AEs. This company was excluded from the set of comparables in assessee s own case in assessment year 2010-11 in ITA No. 1478/DEL/2015. 26. The relevant findings of the coordinate bench in assessee s own case [supra] read as under: The comparable company is involved in activities beyond engineering design. It is engaged in activities that extend from concept to commissioning. Whereas the assessee provides services as a captive unit to its overseas AEs. The diversified functions of this comparable company include pre-project activities, procurement assistance, project management, commissioning and coordination, inspection, construction and supervision. Further, there is no segmental accounting in the annual report of the Company which provides profitability, for the engineering design segment. Hence the same cannot be accepted as a comparable. 27. Respectfully fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by international funding agencies like the World Bank, African Development Bank and the Asian Development Bank, GPCL is capable of providing to the project authorities, apt and appropriate advice and service in procurement, strictly following the procedures and policies of multilateral funding agencies and authorities. The company is registered with the World Bank, African Development Bank and other financial institutions. The procurement phase is the key activity in project cycle. GPCL monitors all procurement activities including project management from concept to commissioning, so as to ensure timely supply and delivery, quality control, thorough inspection, effective cost control and adherence to re schedules. Our expertise will benefit the clients in getting an unbiased cost effective and exclusive professional service, which is also environment friendly financial institutions and project authorities who are particular on judicious utilization of funds prefer independent procurement consultants like GPCL. GPCL's consultancy services encompass: Preparing and reviewing technical specifications. Estimation of costs. Selection of vendors. Inspection an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set of comparables. (vi) MITCON CONSULTANCY AND ENGINEERING SERVICES 31. The profile of this company suggests that it provides technical consultancy in various areas such as power division, energy and carbon service division, banking and finance division. This company also renders vocational trainings, IT trainings and laboratory services from which it earns 40% (approx.) of its revenue. From a screen shot of its profile, which is also at page 113 of appeal set, shows that the Ministry of Environment and Forest, Government of India extended its accreditation to the laboratory of this company. It is further seen that this company has also exclusively completed QCI-NABET accreditation process mandatory for EIA consultants. The company has also executed environment monitoring assignments for TACO group, Volkswagon, Kirloskar Brothers. This company is also engaged in the banking and finance, entrepreneurship and vocational training. In our considered opinion, the functional profile of this company is not at all comparable with the function performed by the appellant company. Therefore, this company cannot be a good comparable. We, accordingly, direct for exclusion of Mitcon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fices on turnkey project execution basis. 21. The appellant also sought exclusion of Engineers India Ltd., a Government company form the list of comparables on the ground that profit motive is not relevant consideration in case of Government undertakings by relying on the judgements cited as M/s. Thyssen Krup Industries India Pvt. 10 ITA No.1476/Del/2015 Ltd. in I.T.A. No. 6460/Mum/2012 New Delhi M/s. Avaya India Private Ltd. in I.T.A. No. 5150/Del/2010 (supra) and contended that the Government companies cannot be taken as comparables for TP by following the law laid down by Hon'ble Jurisdictional High Court in M/s. Avaya India Pvt. Ltd. and M/s. Thyssen Krupp Industries India Pvt. Ltd. (supra). The Government undertakings can even operate on losses in furtherance of social objectives of the Government. By relying on the judgement supra as well as on functional disparity between aforesaid comparable company and the appellant company, this company is ordered to be excluded from the list of comparables. 35. Respectfully following the findings of the coordinate bench [supra], we direct the TPO/Assessing Officer for exclusion of RITES Ltd. from the final set of comparables. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... based on its functional profile, holding that the comparable company is involved in software services. The Ld.AR submitted that this comparable company is not into software services, instead, is engaged in providing consultancy activities in Engineering solutions and services covering design, detailed engineering, project construction management. The ld.AR submitted that this comparable company provides engineering design solutions, and other related services, which is functionally similar to that of the assessee. We observe that the DRP has not given any reasons for rejecting this comparable. On examination of the papers on record, we are in agreement with the submissions of the ld. AR. Hence we direct the A.O to include this company as a comparable. 40. Respectfully following the findings of the coordinate bench [supra], we direct the TPO/Assessing Officer for inclusion of Accuspeed Engineering Services India Limited in the final set of comparables. SEGMENT II FINANCIAL ACCOUNTING SUPPORT SERVICES SEGMENT 41. The assessee as a captive service provider is engaged in the provision of services related to accounts payable management, payroll processing, invo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... demand patterns and needs of customers, inability to develop / penetrate in a market, etc. BIPL does not have any direct exposure to this risk because it is a back office support service provider for overseas group companies. All market risks with respect to the services including customer acceptance are borne by overseas group companies. Service liability risk: Risks associated with service failures including non-performance to generally accepted or regulatory standards. This could result in service recalls and possible injuries to end- users. BIPL renders services to the Group Companies. Thus, BIPL is not responsible to the end customers of the Group, and thereby does not have any exposure to this risk. Overseas group companies enter into contracts with end customers and hence bear all the risk associated with service quality. Research Development ( R D ) risk: Represents risk that R D activities performed by an enterprise may not be successful. BIPL does not undertake any R D activities in relation to the services provided to its AEs. Hence, it does not b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndercutting, and thereby adversely impacting profitability. BIPL has exposure towards this risk, since the price pressures in the industry would affect the compensation for its services. The AEs operate in the open market and hence are exposed to this risk. 44. However, when the matter was agitated before the DRP, the DRP observed that considering the facts and description of services given, it is clear that the assessee is a high- end KPO in this segment . In our considered opinion, considering the services provided by the assessee in this segment, it would be erroneous to conclude that the assessee is a high-end KPO in this segment. Moreover, the FAR analysis given by the appellant was accepted by the TPO in his order. 45. Comparables finally selected by the TPO and confirmed by the DRP are as under: No. Company Name OP/TC % 1 Accentia Technologies Ltd. 29.18% 2 Acropetal technologies Limited(Seg) 14.36% 3 e4e Healthcare ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny was rejected as a comparable in assessee s own case in assessment year 2010-11 in ITA No. 1478/DEL/2015. 50. The relevant findings of the co-ordinate bench read as under: This company has been included by the ld.TPO as a comparable. Functionally, Accentia Technologies Ltd., is into development of software products for healthcare. It is submitted by the ld.AR that 17 ITA No. 1478/Del/2015 Accentia Technologies Ltd is also engaged into diversified activities such as Knowledge Process outsourcing(KPO), Legal process outsourcing(LPO), Data process Outsourcing(DTO), high end software services. It is also submitted by the ld.AR that segmental information in respect of this company is not available. It has been further brought to our notice that this company has been rejected by the Ld.TPO in the earlier year. The company has also had business restructuring during the year under consideration thereby giving rise to extraordinary circumstances. For all these reasons we direct the Assessing Officer to exclude this company as a comparable. 51. As the co-ordinate bench in the earlier year has rejected ATL as a good comparable, we do not find any reason why the same should be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any also undertakes software testing and validation activities. Possession of intellectual property rights has to be factored if such a company is to be taken as comparable. This cannot be done unless there is appropriate data. Further, from the TP study we observe that, this company is a wholly owned subsidiary of TCS E serve International Ltd. During the year under consideration, this company has made payments towards use of Tata brand. Consequentially use of the TCS brand has substantially increased the operating profits post acquisition. Hence we are of the opinion that this company cannot be taken as a comparable. We therefore direct to exclude this comparable. 56. Considering the functional dissimilarities in the light of the findings of the coordinate bench [supra], this company is not a good comparable. We, therefore, direct for exclusion of TCS from the final set of comparables. SEGMENT III IT INFRASTRUCTURE SUPPORT SERVICES SEGMENT 57. The functions performed by BIPL under this segment are as under: Functions performed by BIPL BIPL has set up an offshore centre at Gurgaon. Presently, BIPL has a team of 600 people approximately who are en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment involves steps like requirement analysis, testing, modification to the existing software and maintenance and enhancement of the software.' 58. The DRP has observed that the description of services given above makes it clear that the assessee is a KPO and is also engaged in software development. While deciding the issue under the segment financial accounting and support services, we have categorically held that the appellant company is not a high-end KPO service provider. 59. Final set of comparables under this segment are as under: Sl. No. COMPANY NAME WC adjusted OP/TC 1 Acropetal Technologies Limited (Information Technology services segment) 22.06% 2 Akshay Software Technologies Limited 2.68% 3 Celstream Technologies Private Limited 14.35% 4 e-Infochips India Private Ltd 55.60% 5 Evoke Technologies Private Ltd 9.36% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered opinion, INFOSYS Ltd does not make a good comparable and deserves to be excluded from the final set of comparables. We order accordingly. (II) WIPRO TECHNOLOGY SERVICES LTD [WTSL] 63. Wipro Technology Services Limited ( the Company ) was incorporated on 15 September 2004 as a subsidiary of Citicorp Banking Corporation. Pursuant to the share purchase agreement dated 21 January 2009, all the shares of the Company was purchased by Wipro Limited, which is the holding company of WTSL. The activities comprise software related support services, primarily information technology software solutions/maintenance and technology infrastructure support services. The company is currently engaged in providing software related support services, primarily information technology, software solutions/maintenance and technology infrastructure support services to Citigroup entities globally which is considered as one segment. Hence there are no separate reportable segments as required by Accounting Standard 17 on Segment Reporting . The transaction between WTS and Citi Group companies falls within the ambit of section 92B of the Act. Therefore, its earning is with a deemed AE and ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,581 - Contribution to PF 877,799 - Staff welfare expenses 128,000 Software Development expenses - Salaries 135,160,463 - Contribution to PF 3,851,751 - Staff welfare expenses 1,395,789 Total Employee Cost 163,045,071 Total Operating Cost 1,065,696,7 Employee Cost ratio 15.30% 67. We find that the DRP has simply confirmed the findings of the TPO by making an observation that the assessee has not been able to controvert detailed findings of the TPO in support of his decision on the comparables selected. In the light of the above factual chart, we do not find any merit in the observation of the DRP considering the fact that Acropetal Technologies Limited fails the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed into diversified services like product engineering services / outsourced product development services Includes product designing and development product feature enhancement, product platform migration, software product testing, license management, Enterprise application development which includes customer relationship management, enterprise resource planning, business intelligence, knowledge management etc. IT service includes global onsite/ offshore software development, custom software development, software testing and Technology expertise Includes technology competency centers in relation to Microsoft competency centre, Sun Java competency centre, Open Source competency centre, cloud computing practice, mobility practice and BI practice. Because of these highly diversified services, this company was not considered as a good comparable for IT Infra Support Services by various coordinate benches to name a few: (i) 3DPLM Software Solutions Limited [IT (TP) A No. 1303/Bang/2012] (ii) NXP Semi-conductors Pvt. Ltd. Vs. ACIT [IT(TP)A 1174/Bang/2011] (iii) Hewlett- Packard (India) Software Operation P. Ltd vs. ACIT [TS-446-ITAT-2015(Bang)TP] (iv) Financial Objects Sof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s be made only for the enhance comparability. But at the same time such data must be reliable and robust and there should be no scope for mechanical adjustments. The Panel has carefully considered the facts of the case and the submissions of the taxpayer. As per Rule 10B(2) and 10B(3) of Income Tax Rules, 1962, Indian transfer pricing provisions prescribe only for reasonable accurate adjustment and further adjustment to the margins of comparables can be made only if they enhance comparability. But at the same time the data for the same must be relevant reliable and. robust. Risk adjustment as a general rule cannot be allowed unless it is clearly shown that the comparables had actually undertaken such risk and how the same materially affected their margins. The revised OECD guidelines of.2010 has also stated. in para 3.54 as under:- Ensuring the needed level of transparency of comparability adjustments may depend upon the availability of an explanation of any adjustments performed the reasons for the adjustments being considered appropriate how they were calculated how they changed the results for each comparable and how the adjustment improves 12 ITA No.1476/Del/2015 comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arding disallowance of utilization adjustment and risk adjustment in para 8.2.6 further goes to prove that merely academic reasons have been given to disallow the same. Case law relied upon by the DRP is not applicable to the facts and circumstances of the case when examined in the light of data brought on record by the taxpayer to decide the issue in controversy. So, findings of DRP/TPO on this issue are liable to be reversed. Consequently, Ground No.2 read with Ground No.1.6 are determined in favour of the appellant for statistical purposes and the file is ordered to be restored to the TPO to decide the matter afresh by passing speaking order after providing opportunity of being heard to the parties. 78. Respectfully following the findings of the coordinate bench, we direct accordingly. 79. Last issue relates to adjustment on account of receivables. 80. This issue was decided in favour of the assessee and against the Revenue by the coordinate bench in the assessee s own case for A.Y 2010-11 in ITA No. 1478/DEL/2015 and order of the Tribunal was upheld by the Hon'ble High Court and Hon'ble Supreme Court in CA No. 4956 of 2017. In A.Y 2010-11, the coordinate ben ..... X X X X Extracts X X X X X X X X Extracts X X X X
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