TMI Blog2018 (12) TMI 326X X X X Extracts X X X X X X X X Extracts X X X X ..... essment year 2010-11 in compliance to the direction of the Ld. Dispute Resolution Panel (DRP) dated 27/11/2014 . 1. The Assessment order passed in pursuance of the diretions issued by the Hon ble Dispute Resolution Panel (Hon ble DRP) is a vitiated order as the Hon ble DRP erred both on facts and in law in confirming the addition of ₹ 15,78,02,761/- made by the Ld. Assessing Officer ( Ld. AO ) Appellant by Dr. Shashwat Bajpai Sh. Sharad Agarwal, Advocates to the Appellant s income by issuing an order without appericiation of facts and law. 2. The Ld. AO erred both on facts and in law in not appericiating that none of the conditions set out in section 92 C (3) of the Incone-Tax act, 1961 ( Act ) are satisfied in the present case. 3. The Ld. AO and the Hon ble DRP erred both on the facts and in law in confirming the transfer pricing adjustment to the income of the Appellant by holding that its international transactions pertaing to provision of IT enabled services ( ITES ) and Marketing Support Services ( MSS ) do not satisfy the arm s length principle envisaged under the act and made the TP Adjustments of ₹ 3,00,26,199 in ITES and ₹ 1,31,86,494/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erating profit margins of the comparables; 3.9 disregarding judicial pronouncements in India in undertaking the TP adjustment. 4. The Ld. AO and the Hon ble DRP erred both on facts and in law in in confirming the determination of the ALP of the Appellant s international transaction pertaining to payment for availing Intra Group Services from its_AE as NIT, against the sum of ₹ 21,231,617/- incurred by the Appellant. In doing so, the Hon ble DRP has grossly erred in agreeing with the Ld. TPO s action in:- 4.1 disregarding the ALP, as determined by the Appellant in the TP documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Rules; 4.2 rejecting the Transactional Net Margin Method ('TNMM') as the most appropriate method to test the transaction pertaining to availing of intra group services, without appreciating that the transaction is closely linked to the function of the Appellant of providing ITES and MSS; 4.3 applying Comparable Uncontrolled Price ( CUP) Method in contravention of the provisions of Rule 10B of the Rules merely based on presumptions that the arm s length value of the transaction is N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appellant s international transaction pertaining to purchase of Fixed Assets of ₹ 9,31,17,292/- and disregarding the aggregation approach adopted by the Appellant and erred in the facts by arbitrarily applying Comparable Uncontrolled Price method ( CUP ) to benchmark this transaction and determining the arm length price at NIL without providing any cogent and factual reasons. 6.1 The Ld. DRP/AO erred in the facts and circumstances of the case by arbitrarily disregarding the documentary evidence submitted by Appellant to support the arm s length nature of the fixed assets purchased from AEs. 6.2 Without prejudice to our grounds above, the Ld. TPO/AO has grossly erred in not giving effect to the directions issued by the Hon ble DRP in respect of restricting the adjustment to depreciation amount. 7. That the Ld. AO has grossly erred in initiating penalty proceedings u/s 271 of the Act mechanically and without recording any satisfaction for its initiation. 8. That the Ld. AO has grossly erred in levying interest under section 234B and 234C of the Act. The appellant craves leave to alter, amend or withdraw all or any of the grounds herein or add any furt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Provision of back office support services 237,691,422 TNMM 13,186,494 4. Purchase of fixed assets 93,117,292 TNMM 93,117,292 5. Availing of legal, finance, human resource, IT support and other support services 21,231,617 TNMM 21,231,617 6. Interest on Receivables 241,159 2.4 For benchmarking, its international transactions relating to provision of CSD, ITES, MSS etc. the assessee selected Transactional Net Margin Method (TNMM) as the most appropriate method (MAM) applying operating profit/total cost (OP/TC) as the appropriate profit level indicator (PLI). The result of the comparable search and economic analysis undertaken by the assessee are summarized as under: Particulars Provisions of software development service0020 Provision of ITES Provision of MSS No. of comparables ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CG-VAK software and export Ltd and exclude Infinite Data System Private Limited, E-info-chips Bangalore Limited from the final list of the comparables. The Ld. DRP also directed to verify the calculation of the related party transactions/sales and exclude Sonata software Ltd from the final list of the comparables, if the related party transactions exceeds 25% of sales. Provision of MSS The Ld. DRP directed to exclude Cyber media India online limited from the final list of the comparables. 2.9 The Ld. DRP also allowed working capital adjustment by applying the SBI prime lending rate. Thereafter, following the direction issued by the Ld. DRP, the Ld. Assessing Officer made a transfer pricing adjustment of ₹ 15,78,02,761/- in the assessment order dated 29/01/2015. Aggrieved with the above adjustment, the assessee is in appeal before the Tribunal, raising the grounds as reproduced above. 3. The ground Nos. 1 and 2 of the appeal being general in nature, we are not required to adjudicate specifically before us and therefore same are dismissed as infructuous. 4. With reference to ground No. 3, the assessee filed a paper book containing pages 1-901, Annul re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld. DR the company has been correctly selected as comparable. 5.4 We have heard the rival submissions and perused the relevant material including the Annual Report of the company. We note that the functions of the company were examined by the Tribunal in ITA No. 146/Del/2013 in the case of the assessee itself for assessment year 2008-09 and it is held that the company is in high-end service (KPO), which cannot be compared with the assessee. The relevant finding of the Tribunal (supra) on the issue whether the medical transcription segment is comparable to that of ITes is reproduced as under: We find that the TPO has treated the medical transcription segment comparable to that of the ITES back office support of the assessee, which is not correct in view of the Hon'ble jurisdictional High Court decision in Rampgreen Solutions Pvt. Ltd. vs. CIT (ITA 102/2015 order dated 10.08.2015) wherein the Hon'ble High Court has held as under: 33. The Special Bench of the Tribunal in Maersk Global Centers (India) Pvt. Ltd. (supra) struck a different cord. The Special Bench of the Tribunal held that even though there appears to be a difference between BPO and KPO Servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 35. As pointed out by the Special Bench of the Tribunal in Maersk Global Centers (India) Pvt. Ltd. (supra), there may be cases where an entity may be rendering a mix of services some of which may be functionally comparable to a KPO while other services may not. In such cases a classification of BPO and KPO may not be feasible. Clearly, no straitjacket formula can be applied. In cases where the categorization of services rendered cannot be defined with certainty, it would be apposite to employ the broad functionality test and then exclude uncontrolled entities, which are found to be materially dissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urgaon) Private Limited in ITA 241 of 2018. In view of the above, the Ld. counsel requested to exclude the company from the final set of the comparables. 6.1 The Ld. DR, on the other hand, relied on the order of the Ld. TPO and submitted that the assessee is engaged in vide range of verticals and thus it is difficult to categorise the assessee as a low-end BPO service provider. 6.2 We have heard the rival submissions of the parties on the issue of exclusion of the company from final set of comparables. We note that the Tribunal in ITA No. 146/Del/2013 for assessment year 2008-09 has examined the issue of functional dissimilarity of the assessee with M/s. E Clarx service Ltd. The Tribunal (supra) held that company cannot be compared with a low-end service provider like the assessee. The relevant finding of the Tribunal is reproduced as under: As regards the aforesaid two comparables [mentioned at sl.nos.(vii) (viii)], The ld. AR at the outset itself pointed out that Eclerx and Vishal are into KPO services. According to him, although KPO services were ITES but the nature of these services were materially different than the services rendered by the assessee. It was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtaken (i.e. the activities performed) are also not comparable with the Assessee. In our view, the Tribunal erred in holding that the functions performed by the Assessee were broadly similar to that of eClerx or Vishal. The operating margin of eClerx, thus, could not be included to arrive at an ALP of controlled transactions, which were materially different in its content and value. In Maersk Global Centers (India) Pvt. Ltd. (supra), the Special Bench of the Tribunal had noted the same and had, thus, excluded eClerx as a comparable. It is further observed that the comparability of eClerx had also been examined by the Hyderabad Bench of the Tribunal in M/sCapital Iq Information Systems(India) (P.) Ltd. v. Additional Commissioner of Income- tax (supra), wherein, the Tribunal directed the exclusion of eClerx as a comparable for the reason that it was engaged in providing KPO Services and further that it had also returned supernormal profits. 38. In our view, even Vishal could not be considered as a comparable, as admittedly, its business model was completely different. Admittedly, Vishal's expenditure on employment cost during the relevant period was a small fraction o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resource outsourcing etc and thus it is functionally dissimilar to the assessee. The Ld. counsel also reiterated the reasons submitted before the Ld. TPO for excluding the above company. 7.1 The Ld. counsel in support of the contention that Infosys BPO Limited, an entity having high brand value were able to command greater profits, relied on the decision of the Hon ble Delhi High Court in ITA 241/2018 the case of EVALUESERVE SEZ (Gurgaon) Private Limited. The Ld. counsel also relied on the decision of the Hon ble High Court of the Bombay in the case of CIT Vs. Pentair water India Private Limited for assessment year 2010-11 reported in (2016) 69 taxmann.com 180 (Bombay), wherein it is held that Infosys BPO Limited having turnover of ₹ 649.56 crores cannot be compared with the company having turnover of ₹ 11 crore. 7.2 On the contrary the Ld. DR relied on the finding of the lower authorities and submitted that there is no advantages to the company of the brand value of Infosys and no expenditure has been incurred by the company for brand value. On the issue of turnover, the Ld. DR submitted that turnover of the assessee company is of ₹ 369 crores which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as unreasonable. The rationale for exclusion is therefore upheld. The assessee was aggrieved by the inclusion of Accentia from a Software Development Company. The Revenue is aggrieved by the exclusion of Accentia from the TP analysis. The DRP had directed its deletion. We observe that the VIA T has noticed the unavailability of the segmental data so far as these comparables are concerned. Furthermore, the functionality of this entity was concerned, it is different from that of the assessee; Accentia was engaged in KPO services in the healthcare sector. 14. In view of the above findings, this Court is of the opinion that no substantial question of law arises. The appeals are dismissed. 7.5 Similarly, the Infosys BPO Limited has been rejected in view of the high turnover by the Hon ble Bombay High Court in the case of CIT versus Pentair water India Private Limited (supra). 7.6 In the instant case also the assessee has sought to exclude the Infosys BPO Ltd on the basis of the high brand value and high turnover of the company. Respectfully, following the above decisions of the Hon ble Delhi High Court and Hon ble Bombay High Court, we direct the Ld. AO/TPO to exclud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing, collections, customer care and payments in relation to the services offered by Citigroup to its corporate and retail clients. Technical services involve software testing, verification and validation of software at the time of implementation and data centre management activities. 8.3 Thus it is evident from the Annual Report of the company for the year under consideration that primarily the company is not engaged in software development and it was engaged in providing IT enabled services (ITes) only. The technical services of software testing, verification and validation the software were carried out at the time of implementation of software only and are in the nature of back-office support. 8.4 On perusal of the Annual Report of M/s TCS E-serve Ltd , we find that it has rendered services identical to the services rendered by TCS e-serve international Ltd. In schedule O to the notes of account of the company, available on page 105 of the Annual Report, the principal activities of the company reported are as under: 1. Background and principal activities TCS e-Serve Limited is engaged in the business of providing Information Technology - Enabled Serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... veloped its own software called Finetran and image index for performing specialized services in medical transcription and patient record management and due to these own developed software s, it has derived substantial benefit/advantages as compared with the companies engaged in call centre services. 9.1 The Ld. DR, on the other hand, referred to page 431 and 434 of the Annual Reports compendium and submitted that profit and loss account read with the scheduled 12 manifests that entire revenue earned during the year was from ITes, and thus the company is functionally similar to the ITes segment of the assessee. On the issue of the RPT filter, the Ld. DR submitted that in the year under consideration the RPT is below 25% i.e. threshold adopted by the Ld.TPO and the business transactions in earlier or subsequent year are not relevant for considering comparison of the company for the year under consideration. 9.2 We have heard the rival submission of the parties and perused the material on record including Annual Report of the company. We agree with the contention of the Ld. DR that the company was engaged only in the ITes segment and RPT during the year is less than th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt and other support services in addition to marketing support services and the lower authorities are justified in including the company as comparable. 10.2 We have heard the rival submissions of the parties and perused the material on record including the Annual Report of the company. We found that the company is engaged in the activity of record management, handling payroll etc which are more in the nature of back-office support services instead of marketing support services rendered by the assessee under comparison. The company has been found to be dissimilar to the function of marketing and other technical support services in the case of Ciena India Private Limited(supra). The relevant finding of the Tribunal is reproduced as under: 46. Keeping in view the stark functional dissimilarity between the assessee company vis- -vis comparable company and by following the decisions rendered by coordinate Bench. We are of the considered view that since the comparable company is into under record management activity vide which it undertakes storage, retention and retrieval of physical or electronic records and also into Payroll and Trust Fund Activity and is handling Payroll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment year 2009-10 the issue has been restored to the file of the Ld. TPO. 13.3 Having heard the rival submission and on the perusal of the relevant record including the order of coordinate bench of the Tribunal in ITA No. 2298/Del/2014, we find that the services in the year under consideration have been availed under the same agreement which was in existence in assessment year 2009-10, thus facts and circumstances are identical to assessment 2009- 10. The tribunal (supra) has observed as under: 16.1. It is observed the assessee has received administrative and regional support services including liaison and support services, legal, finance, human resource, IT and such other reasonable support services from its AE. The Id. AR has submitted that these services has been availed from the AE and has not been performed by the assessee itself nor the same has been availed from any 3rd party in India and outside India assessee has made payment amounting to ₹ 2.51.62,460/- to its AE for such intragroup services. 16.2. The Id. TPO as well as DR was of the view that the assessee had not conducted far analysis in regard to these alleged intragroup services and had faile ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preciation is already offered to tax in India and hence shall not be again disallowed. Without prejudice, the Ld. Counsel also submitted that instead of disallowing entire cost of fixed assets, the depreciation charged on such assets should be disallowed. 15.3 Further, the Ld. counsel submitted that the transaction of purchase of fixed asset is a tax neutral exercise because if the amount of depreciation is taken at nil then amount of income to the extent would also be at nil. In support of the contention the Ld. counsel relied on the decision of the coordinate bench of Tribunal in the case of BC Management services Private Limited reported in (2017) 83 taxmann.com 346 ( Delhi trib). 15.4 The Ld. DR, on the other hand, submitted that issue in dispute may be restored back to the file of the Ld. TPO for verification of the invoices raised in respect of purchase of fixed assets. In the rejoinder, the Ld. counsel of the assessee submitted that invoices of purchase have already been verified by the Ld.TPO. 15.5 We have heard the rival submission and perused the relevant material on record including the order of the Tribunal cited by the Ld. counsel of the assessee. We fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 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 the TPO to treat the ALP of this international transaction at Nil. Normally, if the assessee fails to give any c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... priate 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 ITA Nos. 6134/Del/2015, 5829/Del/2015 6572/Del/2016 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 hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e revenue side of this transaction. If we consider these closely linked transactions 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. 15.6 Respectfully following the above decision of the coordinate bench of tribunal, we hold that no adjustment could be made by taking the value at nil. The ground of the appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X
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