TMI Blog2019 (6) TMI 49X X X X Extracts X X X X X X X X Extracts X X X X ..... tain fixed assets from its AE wherein it had declared certain value. And the same has been rightly reported as purchase of fixed assets with the transacted value, as international transaction. This transaction is definitely covered within the definition of section 92B (1) and for any income arising from an international transaction arm s length price has to be determined in accordance to section 92C. Assessee has applied TNMM as most appropriate method for showing that the international transaction is at arm s length price. As observed from records that the matter needs to be restored back to file of Ld.TPO because markup cannot be taken as zero as has been done by TPO. Admittedly assessee gets depreciation as well as cost plus markup on the fixed assets purchased from AE. From order passed by Ld.TPO at page 225, it is observed that assessee, has not filed documents/evidences/proof showing value of assets as appearing in books of AEs to satisfaction of TPO. We direct Ld.TPO to determine the ALP based upon FAR analysis and on contemporaneous document filed by assessee. Assessee is directed to file all requisite details in respect of price for determining the arm s length pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of ITeS. 5. The learned TPO/AO has erred both on facts and in law and has vitiated the principles of natural justice by: a. not giving due cognizance to the detailed analysis and technical arguments submitted by the appellant; and b. issuing their respective orders after relying on completely new facts without giving the Assessee a proper opportunity of being heard. 6. That on facts of the case and in law, the learned DRP has grossly erred in giving a direction to rectify the arithmetical errors in the computation of the operating margins of alleged comparable companies in compliance with the Income Tax Act ( the Act ) without appreciating that Indian regulations do not prescribe the methodology for computing operating margins which may apply to the Appellant. The learned DRP has erred in directing the learned TPO/ AO to recompute margins of comparables using Safe Harbour Rules without appreciating that: a. Appellant has not applied for being assessed under safe harbor provisions; b. Safe harbour provisions do not reflect arm s length nature of margins; and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aining to purchase of fixed assets on standalone basis and rejecting the combined transaction approach adopted by the Assessee to benchmark the said impugned transaction wherein the Assessee considered the Transactional Net Margin Method ('TNMM') as the most appropriate method. 12. That on facts of the case and in law, the learned DRP/TPO/AO have erred in determining the arm s length price of the international transaction pertaining to purchase of fixed assets: a. by completely ignoring relevant facts and circumstances of case; b. in failing to understand that depreciation charged on the fixed asset forms part of the cost base of Post sales technical support services segment wherein the Appellant has earned a margin of 12.23 percent which was considered to be at arm s length by the learned TPO/ AO; and c. by not appreciating the fact that a valuation has been undertaken by the custom authorities in relation to the subject fixed assets and the such valuation can be considered as the arm s length price under Indian transfer pricing regulations. General Grounds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration. Upon receipt of such reference, Ld. TPO issued notice under section 92 CA(1) of the Act and directed assessee to provide economic analysis as prescribed under Rule 10 D of Rules. 2.3. Ld.TPO observed that assessee had entered into following international transaction with its AE: Sl. No. International Transactions Amount (In Rs.) 1. Provision of software R D Services 2,219,623,967 2. Provision of software R D Services 540,854,522 3. Provision of Pre-sale marketing support Services 145,404,538 4. Provision of post-sale technical support Services 295,714,258 5. Purchase of fixed assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TCS E-Serve Ltd. 61.33% 61.33% 6. Excel Infoways Ltd. (Segmental) 38.00% 20.94% 7. R Systems International Ltd.(Seg) -2.58% -5.13% 8. Indoaya BPO Ltd. 34.15% 32.94% 9. Aeropetal Technologies Ltd. (Seg.) 15.02% 15.02% 10. BNR Udyog Ltd. 45.83% 33.65% 11. E4e Healthcare Business 18.64% 18.64% 12. Microge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and its associated enterprise with regard to the identified transaction are outlined below: Determining the scope of services The broad scope of work to be undertaken by Cadence India in connection with the IT back office support service transaction is outlined in a Service Agreement between Cadence India and CDS. CDS provides guidelines to Cadence India for provision of IT back office support services by Cadence India. Provision of services Cadence India is responsible to provide the agreed services as and when requested by overseas group entities as per terms laid out in the Service Agreement. The IT enabled back office support services rendered by Cadence India to CDS include broadly two categories of services: Voice b ased IT enabled call centre services IT support centre which renders the following gamut of support services IT enabled Vendor Management Services IT enabled Asset management services Remote Infrastructure management services Application maintenance and support services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Briefly summarised below are some of the key business risks, which would be applicable to Cadence India and CDS in relation to the IT back office support services transaction. Business risk/market risk Business risk arises when a firm is subject to adverse sales conditions due to either increased competition in the marketplace, adverse demand conditions within the market, or the inability to develop markets or position products to service targeted customers. Cadence India bears no business risk as it renders IT back office support services only to CDS and is assured of a specified return on its costs. CDS is exposed to open market conditions that directly impact its business and thus it bears market risk. Credit and collection risk Credit and collection risk arises when an entity supplies products or services to a customer in advance c f customer payment and runs the risk of default of such payment. Cadence India does not bear any credit and collection risk since it transacts with its AE i.e. CDS and receives payment for services fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om foreign exchange translations and therefore ultimately the foreign exchange risk would be borne by CDS. Cadence India does not bear any risk on account of foreign exchange fluctuations. The risk analysis for this transaction has been summarized below: Type of Risks Cadence India CDS Business risk No Yes Credit and collection risk No Yes Service liability risk No Yes Utilisation risk No Yes Re-work risk No Yes Type of Risks Cadence India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese findings for the current year, we do not find any reason not to accept the same or to take a different view. We, therefore, direct the ld. AO/TPO to exclude this company from the list of comparables. 8.2. From order passed by Ld.TPO, this comparable has been considered at page 220 to be carrying out activities in financial sector like trade processing, reference Data, accounting and finance and expense management activities. It has also been recorded by Ld.TPO that professional service practice includes consulting, business analysis and solution testing. The activities provided by this comparable in manufacturing verticals are online operations and web analytics, CRM and business intelligence data management and reporting competent benchmarking and pricing quality and compliance business process consulting. 8.3. On analysis of aforestated functions performed by this comparable, we agree with the view expressed by this Tribunal for assessment year 2011-12 that this comparable is a best KPO company outsourcing substantial work to 3rd parties and that assessee is only providing back-office support services with its own human ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cy which reflected an impacted TCS e-serve profitability in a positive manner is upheld by the Hon ble jurisdictional High Court which is binding on this Tribunal. Merely because the binding precedent of the Hon ble High Court in this order dated 28.11.2017 was not brought to the notice of the Tribunal when it pronounced its order on 5.11.2018 does not make any difference on the binding nature of this decision or its applicability to the facts of the present case. As a matter of law, had such decision been brought to the notice of the Tribunal in assessee s own case for the AY 2010-11, still it would have bound the Tribunal to follow the same. In the circumstances, we find no option but to follow the binding precedent of the jurisdictional High Court in the case of B.C. Management Services P. Ltd. (supra) and to hold that. Infosys BPO Limited and TCS E-Serve Limited are not good comparables to the assessee and both these companies deserve to be deleted from the list of comparables from bench marking the international transactions. 10.3 . Under such circumstances we find no reason to differ from the binding precedent. It is also observed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted value amounting to ₹ 2,14,50,372/-, as international transaction. This transaction is definitely covered within the definition of section 92B (1) and for any income arising from an international transaction arm s length price has to be determined in accordance to section 92C of the Act. We observe that assessee has applied TNMM as most appropriate method for showing that the international transaction is at arm s length price. 13.2. It is observed from records that the matter needs to be restored back to file of Ld.TPO because markup cannot be taken as zero as has been done by Ld.TPO. Admittedly assessee gets depreciation as well as cost plus markup on the fixed assets purchased from AE. From order passed by Ld.TPO at page 225, it is observed that assessee, has not filed documents/evidences/proof showing value of assets as appearing in books of AEs to satisfaction of Ld.TPO. 13.3. Thus we direct Ld.TPO to determine the ALP based upon FAR analysis and on contemporaneous document filed by assessee. Assessee is directed to file all requisite details in respect of price for determining the arm s length price of the transa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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