TaxTMI 
TaxTMI 
2017 (8) TMI 1557
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....ncome on 27.03.2014 declaring total income of Rs. 19,95,75,120/-. The Assessing Officer referred the matter to the TPO for determining the arm's length price in respect of the international transactions entered into by the assessee as per the provisions of section 92CA(3) of the I.T. Act. In response to notice u/s. 92CA(2), the assessee furnished various details. The TPO observed that the assessee has reported the following international transactions in the Form No. 3CEB :- S. No. 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 recharge paid/payable 10908058 12 Cost recharge received/receivable 24602285 3. The TPO issued a show cause notice asking the assessee to justify the arm's length price in respect of its international transactions representing ITES, purchase of fixed assets, and receiv....
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....e circumstances of the case and in law, DRP/AO/TPO erred in making an adjustment of Rs. 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 enterprises in the ITeS segment by: 3.1 Accepting additional/modified filters selected by TPO in the ITeS segment which lacked valid and sufficient reasons. 3.2 Disregarding the economic and comparability analysis as conducted by the Appellant in the Transfer Pricing documentation ("TP documentation") maintained by it in terms of section 92D of the Act and in rejecting appropriate comparable companies selected by the Appellant and in accepting comparable companies that are functionally not comparable. 3.3 Selecting certain companies which had significantly high turnover and/or were not comparable by way of functions, assets and risks in order to determine the arm's length margin applicable to the Appellant. 3.4 Arbitrarily rejecting the risk analysis conducted by the Appellant for the ITES segment in its transfer pricing submissions without taking cognizance of the fact that the Appellant....
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.... 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 section 234B and 234C of the Act and withdrawing interest under section 244A of the Act. 10. That DRP/AO/TPO erred on the facts and in the circumstances of the case and in law, in initiating penalty proceedings under section 274 read with 271(1)(c) of the Act. The above grounds of appeal are mutually exclusive and without prejudice to each other. The Appellant craves leave to add, alter, amend or vary any of the above grounds either before or at the time of hearing as we may be advised.' 6. The assessee has also taken an additional ground which reads as under :- "Ground No. 11 - Without prejudice to other grounds, that on the facts and circumstances of the case and in law the Ld. AO failed to follow the DRP directions in restricting the arm's length cost of fixed assets at invoice value less mark up. Thereby, erred in disallowing the entire depreciation instead of depreciation on mark-up charged." 7. The ld. counsel for the as....
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....ssing Officer to exclude Accentia Technologies Ltd. and Eclerx Services Ltd. and retained the remaining 7 comparables. He submitted that after giving effect to the order of the DRP, the mark-up comes to 22.26% as against 27.65% mark-up determined by the Assessing Officer/TPO. He submitted that mark-up of the assessee for the impugned assessment year was 10.00%. Ld. counsel for the assessee submitted that as Baxter India is engaged in providing human resource related services, payroll processing services, training and performance system data entry, etc. to its AE, its services can be termed as routine ITES services. He submitted that the sales turnover of ITES segment for financial year 2011-12 is Rs. 11.86 crores. This comprised only 2.65% of total turnover of Baxter India for financial year 2011-12. 12. Ld. counsel for the assessee submitted that for the ITES segment, the assessee can be classified as a routine service provider assuming minimal risks since it is compensated on a cost plus basis. Referring to page 153 of the Paper Book, he submitted that as per action point 10 of Base Erosion and Profit Shifting Action Plan (BEPS) issued by OECD, low value intra group services are....
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....al profitability trend and super normal profits are the other grounds for rejection of TCS e-Serve Ltd. as a comparable. He submitted that this company was examined by the Delhi Bench of the Tribunal in assessee's own case in ITA No. 345/Del/2016 and company was excluded from the list of comparables while computing the average margin of comparables. 14.1 Referring to the decision of the Bangalore Bench of the Tribunal in the case of Swiss Re Global Business Solutions India (P.) Ltd. v. Dy. CIT [IT (TP) Appeal No. 2315 (Bang.) of 2016, dated 13-4-2017] for the assessment year 2012-13, he submitted that the Tribunal had directed the Assessing Officer/TPO to exclude TCS e-Serve Ltd. from the list of comparables on account of high turnover. 15. Referring to the decision of Delhi Bench of the Tribunal in the case of Actis Global Services (P.) Ltd. v. ITO [2016] 76 taxmann.com 41 for assessment year 2011-12, he submitted that the Tribunal has directed the Assessing Officer/TPO to exclude TCS e-Serve Ltd. from the list of comparables. Similar view has been taken in the case of FIL India Business Services (P.) Ltd. v. Dy. CIT [2016] 70 taxmann.com 42 (Delhi - Trib.) for assessment ye....
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....ent from that company. He accordingly requested that Infosys BPO Ltd. should be rejected. 17. So far as Excel Infoways Ltd. is concerned, he submitted that the TPO rejected the contention of the assessee on the ground that the company is not meeting employee cost to sales filter of less than 25%. He submitted that this company fails to pass TPO's own filter of diminishing revenue and abnormal volatility in revenue and margins. It has got super normal profits. Referring to the decision of Mumbai Bench of the Tribunal in the case of Dy. CIT v. Willis Processing Services India (P.) Ltd. [IT Appeal No. 2125 (Mum.) of 2014], he submitted that Excel Infoways Ltd. was excluded on account of supernormal profits. Further, it fails employee cost to sales filter as applied by the TPO. 18. So far as the companies wrongly rejected by the TPO/DRP is concerned, ld. counsel for the assessee requested for the inclusion of R System International Limited (Seg.) as a comparable. He submitted that the TPO rejected this company on account of different financial year ending. He submitted that audited quarterly results of the comparable company is available and the margin of the relevant financial y....
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....e considered the submissions of both the parties. It is not disputed that TCSe-Service was engaged, inter alia, in software development services and the segmental details between ITEs and SDS were not there in the annual report. Moreover, from the annual report it is evident that its brand value also was considerable, which added to it profitability substantially. As compared to this, assessee was rendering only human resource services to its AE, on which profit margin derived by it was quite reasonable. Further, we find that in the case of Actis Global Services Pvt. Ltd. (ITA no. 6175/Del/2015 for AY 2011-12, ITAT observed in regard to TCS-E-Serve Ltd., as under: "22. Before us, the td. A; submitted that this company is engaged in services like software testing, verification and validation and data centre management services which falls under software development services, different from low end, low risk ITES segment. He further ... should be excluded. 24. We have carefully considered the rival submissions and also referred to page No. 247 of the paper book filed before us wherein relevant extracts from annual reports shows that it includes technical s....
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....at functions performed by TCS-e-Serve Ltd. included rendering of technical services like software testing etc., which required skilled persons. As far as the objection regarding related party transaction is concerned, we are in agreement with the reasoning given by ORP that since this company was taken over by TCS group, therefore, there was no question of any separate details being given about related party transaction. However, keeping in view the various factors, pointed out by Id. counsel for the assessee, which we have noted earlier, this company cannot be taken as a comparable to the tested party." 20. Therefore, we are in agreement with the submission of ld. counsel that TCS e-Serve Ltd. is to be excluded while computing the average margin of comparables. We direct accordingly.' 22. Respectfully following the decision of the order of the Tribunal in assessee's own case in the immediately preceding assessment year and in absence of any distinguishable features brought to our notice by ld. DR, we direct the TPO/Assessing Officer to exclude the TCS e-Serve Ltd. from the list of comparables while computing the average margin of the comparables. We hold and direct acco....
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....he companies with losses/diminishing revenue for the last three years upto and including the financial year 2010-11 were rejected as comparables. 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. From the submissions of the assessee before the TPO (at page 232 of Volume - I of the Paper Book) we find the details of the operating margin of the company from financial years 2009-10 to 201-15 are as under :- Particulars Financial Year 2009-10 (INR'000) 2010-11 (INR'000) 2011-12 (INR'000) 2012-13 (INR'000) 2013-14 (INR'000) 2014-15 (INR'000) Revenue 204,161.34 203,526.39 79,096.95 76,098.54 52,792.12 22,994.38 Operating Cost 43,986.99 50,751.24 55,991.57 47,539.99 41,355.78 22,895.57 Operating Profit 160,174.35 152,775.14 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....
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....the ld. counsel for the assessee before the TPO/DRP we find that audited quarterly results of the comparable company are available and the margin of the relevant financial year was calculated. Since the above company is functionally comparable, clears all filters of the assessee and PLI for year ending March 2012 has been computed, therefore, merely because the above company is following different financial year, the same cannot be a ground to reject the said company from the list of comparables. 27. We find identical issue had came up before the Hon'ble Delhi High Court in the case of Mckinsey Knowledge Centre India (P.) Ltd. (supra) where the Hon'ble High Court has observed as under :- "14. The Revenue is in appeal before this 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 ....
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....ponding period of both the entities in determining whether the two are comparable or not for the purpose of determining the ALP. 29. As noted by the Tribunal, the audit accounts of R System International Ltd. for the year ending 31.12.2008 had been given under one column and the data for the quarter ending 31.03.2009 and 31.03.2008 (both audited) had been given in two other columns. Thus, as rightly held by the Tribunal, 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. 30. This view is not contrary to Rule 10(B)(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....
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.... independent overseas comparable manufacturing companies is 13.63%. Since the AEs have charged a lower mark-up than the comparable companies, therefore, the transaction is at arm's length. Referring to page 659 of Volume - I of Paper Book, he submitted that SVB order evidencing the arm's length nature of import of goods was submitted to the TPO/DRP. Further, during the financial year 2011-12 fixed assets to the tune of Rs. 1,80,20,576/- has only been capitalized. These comprise only 16.19% of the total assets purchased during the year. The value of depreciation claimed during the financial year 2011-12 on the purchase of fixed assets is only Rs. 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 a....