TMI Blog2017 (8) TMI 1557X X X X Extracts X X X X X X X X Extracts X X X X ..... nto areas like Insurance, Banking, Financial Services, Manufacturing and Telecom which are in the niche areas, unlike the assessee. Functionally not comparable, presence of brand and extraordinary event that has taken place during the year on account of acquisition of Australian based company, we are of the considered opinion that Infosys BPO Ltd. should not be included in the list of comparables Excel Infoways Ltd. fails TPO's own filter of diminishing revenue and abnormal volatility in revenue and margins.The department has excluded such companies with consistent losses/diminishing revenue in an environment where Indian economy is growing at consistent rate. Having held so, the Assessing Officer included Excel Infoways Ltd. as a comparable without considering the fact that the said company does not pass the diminishing revenue filter - above company has super normal profits. R System International Limited - Since the assessee in the instant case has provided the audited quarterly results of the comparable company and the margin of the relevant financial year has been calculated, therefore, following the decisions MCKINSEY KNOWLEDGE CENTRE INDIA PVT. LTD. [ 2015 (3) TMI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... International Transaction Amount in INR 1 Purchase of raw material 546730531 2 Sale of goods 612259008 3 Payment of royalty 64377766 4 Availing of services 7534649 5 Purchase of finished goods 1123924565 6 Provision of services 16210677 7 Provision of services (ITES) 10782582 8 Purchase of spare parts and fixed assets 113506642 9 Interest on loan 13561735 10 Networking charges 23727954 11 Cost r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the facts and in the circumstances of the case and in law, the Hon'ble Dispute Resolution Panel ( DRP )/Learned Assessing Officer ( AO )/Learned Transfer Pricing Officer ( TPO ) erred in making addition to the returned income of the appellant by INR 1,45,70,988/- by re-computing the arm's length price of international transactions under section 92 of the Income Tax Act, 1961 ( the Act ) and the orders are bad in law and void ab-initio. 2. That on the facts and in the circumstances of the case and in law, the reference made by AO suffers from jurisdictional error as the AO did not record any reasons in the draft assessment order based on which he reached the conclusion that it was necessary and expedient to refer the matter to the TPO for computation of the arm's length price, as is required under section 92CA(1) of the Act. Provision of IT Enabled Services ( ITes ) Segment 3. That on facts and in the circumstances of the case and in law, DRP/AO/TPO erred in making an adjustment of ₹ 1,32,19,445/- to the returned income of the Appellant by re-computing the arm's length price of the international transactions with its associated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uation certificates by chartered engineer submitted by the Appellant for evidencing the arm's length nature of the purchase of fixed assets. 6. That on facts and in the circumstances of the case and in law, the DRP/AO/TPO erred in not appreciating that the Appellant had also evidenced the arm's length basis of the mark-up charged by the AEs on the sale of some of the fixed assets. 7. That on facts and in the circumstances of the case and in law, DRP/AO/TPO erred in not appreciating that the Arm's Length Price of Appellant's international transactions of purchase of finished goods had been accepted by the customs department as per the Special Valuation Board Order and that arm's length price accepted by one Governmental authority cannot be disregarded by the other Governmental authority. 8. That on facts and in the circumstances of the case and in law, the DRP/AO/TPO erred in not providing any comparable data to hold the arm's length value of the purchases of fixed assets to be nil . 9. That DRP/AO/TPO erred on the facts and in the circumstances of the case and in law, in charging and computing the interest on demand under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vel Indicator (PLI). Referring to page 1039 of Volume II (Page 4 of the TPO's order), he submitted that the assessee selected 7 comparables with mark-up of 12.77%. Referring to page 5 of the TPO's order, he submitted that the TPO had initially selected 12 comparables with mark-up of 25.38%. Referring to page 64 of the TPO's order, he submitted that the TPO had finally selected 9 comparables with mark-up of 27.65%, the details of which are as under :- 10. Final set of comparable companies are as under :- S.N. Name of the comparables OP/OC (%) 1 Informed Technologies India Ltd. 7.62 2 Jindal Intellicom Ltd. -0.05 3 Accentia Technologies Ltd. 11.95 4 Eclerx Services Ltd. 58.4 5 Infosys BPO Ltd. 36.75 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices, BEPS Action Plan 10 has recommended the arm's length charge for such services to be at 5% on cost. He submitted that since the services provided by Baxter India are covered under the ambit of low value adding services as defined under BEPS action plan 10, and since Baxter India charges a mark-up of 10% on cost for such services, therefore, the transactions of Baxter India are at arm's length even as per BEPS Action Plan 10. 13. So far as the comparable companies wrongly selected/rejected by TPO/DRP are concerned, the ld. counsel for the assessee submitted that the three comparables namely (i) TCS e-Serve Ltd., (ii) Infosys BPO Ltd. and (iii) Excel Infoways Ltd. should be excluded from the list of comparables and R Systems International Limited which was excluded by the TPO/DRP should be included. 14. So far as the TCS e-Serve Ltd. is concerned, he submitted that the TPO rejected the contention of the assessee stating that the company is engaged in ITES and high turnover does not have any correlation with the profitability. He submitted that this company was rejected as a comparable in assessee's own case for assessment year 2011-12 on the groun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her mentioned that the Annual Report does not mention anything in regard to brand deriving its profitability. According to the TPO, the brand in service industry may derive revenue but does not affect the profitability. Ld. counsel for the assessee submitted that Infosys BPO Ltd. is functionally not comparable since the services are in the niche areas. He submitted that this company fails the TPO's own filter of rejecting companies with peculiar circumstances, since this company has acquired the Australian based company M/s. Portland Group Pty Ltd. during the financial year 2011-12. Further, the turnover of this company is more than 111 times than that of the assessee company and it has a presence of brand. 16.1 Referring to the decision of the Bangalore Bench of the Tribunal in the case of Swiss Re Global Business Solutions India Pvt. Ltd. (supra) for assessment year 2012-13, he submitted that this company was examined by the Tribunal and the Tribunal directed the Assessing Officer/TPO to exclude Infosys BPO Ltd. on account of high turnover. Referring to the decision of Delhi Bench of the Tribunal in the case of Actis Global Services Pvt. Ltd. (supra), he submitted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion has been entered into is directly available from the annual accounts of that comparable, then it cannot be held as not passing the test of sub-rule (4) of rule 10B. The Tribunal had rightly held that if from the yearly data ending 31.12.2008, the results of the quarter ending 31.03.2008 are excluded and if the results for the quarter ending 31.03.2009 are included, it is possible to obtain the data for the financial year 01.04.2008 to 31.03.2009. 18.2 Referring to the decision of Hon'ble Delhi High Court in the case of Mckinsey Knowledge Centre India (P.) Ltd. [IT Appeal No. 217 of 2014, dated 27-3-2015], he submitted that this principle was also accepted by the Hon'ble High Court where it was held that the comparable cannot be excluded solely on the ground of different financial year ending. He accordingly submitted that R System International Ltd. should be included as a comparable company. 19. Ld. DR, on the other hand, heavily relied on the order of the TPO/AO/DRP. 20. We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer and the DRP and Paper Book filed on behalf of the assessee. We hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 24 of that order, it was held to be excluded compared to low risk ITES company like Appellant. Further, the decision of the coordinate Bench in the case of Ameriprise India Pvt. Ltd. has considered in ITA No. 701410el.l2014 at para No. 12 has excluded this company as under: 12. TCS e-Serve Ltd. 12.1 The assessee objected ... Thus, the entity level figures render this company as unfit for comparison. Following the above reasons also taken note in the case of TCS e-Serve International Limited, we order for the elimination of this company from the final set of comparables. Therefore, following the decision of the coordinate Bench, we direct exclusion of TCS E-Serve Limited from the final list of comparables. 19. Further, in the case of FIL India Business Services Pvt. Ltd. (ITA no. 6867/Del/2014) for AY 2010-11, Tribunal has observed in regard to TCS E-serve Ltd., segment as under: 56. We have considered the rival submissions and perused the material available on record. This comparable has been directed to be excluded in the case of Equant Solutions India Pvt. Ltd. (supra). The business profile of Equant Solutions India Pvt. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the pricing policy thereby directly impacting the margins earned by the Infosys BPO Ltd.. We find the submissions of the ld. counsel for the assessee before TPO/DRP that in order to maintain the brand image of Infosys BPO Ltd. in the market, the company incurs substantial selling and marketing expenditure whereas the assessee being a contract service provider does not incur such expenses to maintain its brand has not been controverted by them. Further, Infosys BPO Ltd. being a subsidiary of Infosys has an element of brand value associated with it. This can be further confirmed by the presence of brand related expenses incurred by Infosys BPO Ltd. Further, Infosys BPO Ltd. has acquired Australian based company M/s. Portland Group Pty Ltd. during financial year 2011-12. They provide sourcing and category management services in Sydney, Australia. Therefore, this company also failed the TPO's own filter of rejecting companies with peculiar circumstances. In view of the above i.e. functionally not comparable, presence of brand and extraordinary event that has taken place during the year on account of acquisition of Australian based company, we are of the considered opinion that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 152,775.14 23,105.38 28,558.55 11,436.34 98.81 OP/OC (%) 364.14% 301.03% 41.27% 60.07% 22.65% 0.43% 25. From the above, it is clear that above company does not pass the diminishing revenue filter as adopted by the TPO himself since its revenue has decreased consistently from financial years 2009-10 to 2011-12 i.e. including the year under consideration. Further, the above company has super normal profits. We further find the submissions of the assessee that Excel Infoways Ltd. has super normal profits during the current year has not been controverted by the Revenue. We find the Mumbai Bench of the Tribunal the case of Willis Processing Services (India) Pvt. Ltd. (supra) has upheld the order of the DRP rejecting Excel Infoways Ltd. as comparable company on the ground that the company has a super normal profit of 203.80% and low employee cost 10.02%. We, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court questioning the admissibility of the above mentioned comparables while computing Arm s Length Price regarding the IT Support services after the TPO and AO rejected the above mentioned companies but was later allowed by the CIT (A) and ITAT. While the AO had confirmed the findings of the TPO, the Ld. CIT (A) after considering the Assessee's submissions accepted all the four companies rejected by the TPO. The revenue submits that Fortune Infotech Ltd. was correctly rejected by TPO because the company had different financial year ending on December, 2006, whereas Assessee s financial year ended on March, 2006. There is nothing shown to the court that supports the revenues argument that the ITAT fell into error in holding that if a comparable is following different financial year then the same cannot be included in the list of comparables selected for benchmarking the international transaction. Therefore, the ITAT has held that if the comparable is functionally same as that of tested party then same cannot be rejected merely on the ground that data for entire financial year is not available. If from the available data on record, the results for financial year can reasonably b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (4) which reads as under:- 10B(4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into . 31. The Rule does not exclude from consideration the data of an entity merely because its financial year is different from the financial year of the assessee. What the Rule requires is that the data to be used in analyzing the financial results of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. Thus so long as the data relating to the financial year is available, it matters not, if the financial year followed is different. In the case before us the data relating to the relevant financial year of R. Systems International Limited is available. 32. We are, therefore, entirely in agreement with the decision of the Tribunal that if the data relating to the financial year in which the international transaction has been entered into is directly available from the annual accounts of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8377; 13,51,543/- which is evident from page 329 of Volume - I of Paper Book. He submitted that as per the TPO, purchase of fixed assets is separate class of transaction, therefore, it needs to be benchmarked separately given by the chartered engineer and held that if a transaction is in accordance with one Government Regulation, it does not apply that it would be at arm's length under the TP Regulations. The TPO accordingly determined the arm's length value of the entire value of the purchase of fixed assets as Nil and made the adjustment of ₹ 11,35,06,642/-. 32. He submitted that the DRP accepted the genuineness of purchase of the fixed assets. However, the arm's length cost of assets was restricted to the invoice value only without mark-up. According to them, the transaction of purchase of fixed assets being on capital accounts, only depreciation should be considered which affects the total income. Accordingly, the DRP directed the TPO to restrict the addition to the amount of depreciation claimed during the year without the mark-up which resulted into adjustment of ₹ 13,51,543/-. He submitted that since out of the assets purchased with mark-up, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he above value. Further, Baxter India Private Limited has not purchased identical/similar capital assets from un-related third party in India. For Baxter India Private Limited Sd/- Finance Director {Authorised Signatory} Baxter (India) Pvt. Ltd. 34. After taking into consideration this certificate, we are of the opinion that the matter needs to be restored back to the file of ld. TPO because the mark up cannot be taken as zero. As noted earlier, the assessee will furnish necessary details of the price charged by AE from third party in order to arrive at the mark up, which was at arm's length from the assessee. Ld. DR submitted that the ld. TPO be also given an opportunity to verify the genuineness of the certificate field before the Bench. We direct accordingly. In the result, this ground is allowed for statistical purposes.' 35. Since the facts of the impugned assessment year are identical to the facts of the case in the immediately preceding assessment year, therefore, following the order of the Tribunal in assessee's own case we restore this issue to the file of the Assessing Officer/TPO with di ..... X X X X Extracts X X X X X X X X Extracts X X X X
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